Unscathed by COVID, Adobe (ADBE) stock can offer impressive returns

When the shelter-in-place orders brought in a new digital era and created a paradigm shift in the way businesses function, it was natural that Adobe Inc. (NASDAQ: ADBE) benefited from that. The company, the undisputed market leader in design software, has remained largely unaffected by the virus crisis so far and generated earnings that consistently topped expectations.

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Adobe sees new tailwinds as virtual shift gathers steam

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With an exceptionally healthy cash flow, the company is well-positioned to meet its long-term investment goals and take forward the expansion program. Market watchers will be looking for a 22% rise in revenues to $3.76 billion when it releases the first-quarter report on March 23, after the closing bell. Earnings are expected to grow 22% to $2.78 per share.

The shift from software licensing to the SaaS model was a major milestone for the Silicon Valley tech firm and the transition helped it enhance margin performance over the years.

Buy ADBE?

Currently, the stock is trading 15% below its September-2020 peak and offers a fresh buying opportunity that looks worth trying. Factors that drove demand growth last year are expected to continue in the coming months, creating new opportunities and setting the stage for Adobe to emerge stronger from the virus crisis. That justifies the consensus strong buy rating on the stock and the bullish price target that represent a 25% upside.

The company has been thriving on the popularity of its distinctive subscription-based product line that includes Photoshop, InDesign, and Illustrator, for which not many alternatives are available. The Creative Cloud suite is eliciting significant interest from customers, creating a consistent revenue stream for the company. Those tailwinds are catalyzed by the rapid adoption of digital services across the market to connect, work and learn — a trend that increased the relevance of Adobe’s solutions.

Broad-based Growth

In the fourth quarter, Adobe’s digital segments expanded in double digits, driving total revenues up 14% to a record high of $3.4 billion. As a result, adjusted earnings climbed 23% annually to $2.81 per share and exceeded the market’s projection. The uptrend was spread across all geographical divisions. Meanwhile, the performance of the publishing and advertising cloud segments, which were combined last year to create a new division called Publishing and Advertising, was not up to the mark.

“We’re focused on adding collaboration services because we can ensure that content can be seamlessly managed in the cloud and accessed from any device. And what this enables us to do on the business side, is to increase engagement, but also to acquire new stakeholders and expand our customer base with these new monetization opportunities. We want to engage and inspire the community, and our vibrant communities, which are a critical driver of both acquisition and engagement are succeeding,” said Adobe’s chief executive officer Shantanu Narayen at the company’s annual financial analysts meeting.

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Read management/analysts’ comments on Adobe’s Q4 report

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Stock Performance

After recovering from the sell-off triggered by COVID-induced market mayhem in early 2020, Adobe’s stock climbed to a record high mid-year. The momentum waned since then and the shares entered 2021 on a low note. They closed Wednesday’s regular session slightly higher.