Investing in growth stocks remains a popular strategy for a multitude of reasons. You can benefit from exponential returns and if you stay invested over a long period of time, growth companies can help accelerate your retirement or help you achieve your financial goals at a rapid pace.
One such top-quality growth stock in the technology space is Adobe (NASDAQ: ADBE) that has created massive wealth for investors in the last decade. For example, if you invested $1,000 in Adobe stock back in July 2010, it would have ballooned to $14,600 today. Comparatively, similar investments in the S&P 500 and the Technology Select Sector SPDR Fund or the XLK would have returned $2,000 and $3,950 respectively.
Adobe stock has managed to outperform the broader markets in the past decade. But we also know that past return matter little to prospective investors. Does Adobe have the potential to outperform peers in 2020 and beyond? Let’s take a look at why investing in Adobe makes perfect financial sense.
An SaaS-based business model
Adobe stock has a market cap of $207 billion, making it one of the largest and well diversified software companies in the world. It aims to enable students, creative artists, enterprises, agencies and global brands design and deliver digital experiences.
Adobe licenses its products to end-users on mobile applications as well as on its own website. It primarily offers products via a SaaS (software-as-a-service) business model or a managed services model, as well as through term subscription or pay-per-use. The SaaS model ensures a stable stream of recurring revenue, which helps companies offset business cyclicality.
Also read: Adobe is still a value investor’s darling
In the fiscal second quarter of 2020, Adobe’s subscription sales totaled $2.87 billion, a rise of 17% year-over-year and accounted for 92% of total sales.
Adobe has two primary business segments, which include Digital Media and Digital Experience. Its Digital Media business provides products and solutions that help clients promote and publish content.
Adobe’s Digital Experience business provides an integrated platform and a set of applications through Adobe Cloud that helps enterprises create, manage, monetize and optimize customer experiences ranging from advertising to commerce. Its Digital Experience platform is used by marketers, advertisers, agencies, publishers, web analysts, and several others.
What makes Adobe stock a solid long-term bet?
Adobe is optimistic about significant opportunities across customer segments and expects Adobe Creative Cloud to drive long-term revenue growth. As part of its Adobe Creative Cloud strategy, the company aims to leverage a data-driven model to drive and improve the customer experience, which in turn helps in customer acquisition and retention.
Further, digital transformation is a macro trend that is accelerating amid the COVID-19 pandemic and a key tailwind to Adobe’s top-line growth. Enterprises now want solutions that optimize customer experiences and deliver a higher return on their IT and marketing spend.
Adobe’s Experience Cloud has helped businesses with its comprehensive suite of solutions. It believes there is tremendous opportunity to help companies navigate their digital transformation process over time.
Adobe stock is trading at a forward price to earnings multiple of 44.4x and a price to sales multiple of 17.5x, which makes it an expensive buy in a volatile market. However, growth stocks tend to trade at a premium, which means investors should view every major correction in Adobe stock, as a buying opportunity.
Related: Adobe Q2 2020 Earnings Call Transcript
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