Why Adobe (ADBE) Deserves a Spot in Your Portfolio

Today I am taking a look at Adobe Inc. (ADBE). The stock has dropped 4% in the past month and I believe this is an opportune time to scoop up shares of the tech company.

Founded in 1982, Adobe is a highly diversified software company that offers multiple products for creative professionals such as developers, designers, photographers, and others. ADBE operates through three key segments: Creative Cloud, Digital Experience, and Publishing and Advertising. 

Industry Overview and Stock Performance 

Verified Market Research reports the Application Development Software industry is expected to grow at a CAGR of 25.54%, reaching $1039.89 billion by 2027. This growth is projected to be fueled by broader usage of the Internet of Things (IoT) technology and increasing demand for cloud-based solutions.

These favorable industry tailwinds have positively impacted ADBE’s stock performance. Shares of the digital and creative-content software developer have rallied 26.4% year-to-date (YTD), outperforming its benchmark, iShares Expanded Tech-Software Sector ETF (IGV), which has gained 19.1% over the same period. 

Recent Developments 

On August 19th, Adobe Inc. announced its acquisition of a leading cloud-based collaboration platform, Frame.io. The transaction has a total value of $1.27 billion and is expected to complete during the fourth quarter of Adobe’s 2021 fiscal year. It’s a positive development that will enhance Adobe’s current industry-leading creative software by delivering more cloud-based options for the video-editing process. 

Recent Quarterly Performance

On September 21st, Adobe Inc. reported earnings for the third quarter of 2021. In Q3, total revenue has risen 22% year-over-year to $3.94 billion, beating consensus estimates by $40 million. 

Its subscription revenue accounted for 92.9% of the total revenues and rose 24% year-over-year to $3.66 billion. The company’s gross profit increased 23.9% from the prior year’s quarter to $3.47 billion.

The company reported Non-GAAP EPS of $3.11, topping Wall Street expectations by $0.09. Additionally, Adobe Inc. repurchased approximately 1.7 million of its shares during Q3.  

Important to note, the company increased its Q4 revenue guidance to $4.07 billion versus the current analysts’ consensus of $4.09 billion, which implies about 19% growth year-over-year. ADBE guides its fourth-quarter GAAP EPS to stand at about $2.52. 

Finally, Adobe currently trades with a P/E Non-GAAP (TTM) of 51.78x and EV / EBITDA (TTM) of 50.18x, which isn’t cheap compared to the sector median threshold of 25.12x and 17.89x, respectively. 

How much volatility are options traders expect for ADBE? 

Looking at the January 21, 2022 option chain, we can calculate the expected price movement using the long straddle options strategy. With that being said, my calculations indicate that ADBE stock could rise or fall by about 12.58% by the January expirations from the $640.00 strike price. In addition, take a look at the number of open calls and put contracts as well. In ADBE’s case, the number of open calls at the $640.00 strike price outweighs the open puts by around 2 times. At the moment of writing, there are 1,160 calls to 569 open puts. This divergence comes up with that options traders are rather bullish than bearish regarding Adobe’s stock medium-term growth prospects. 

The Bottom Line 

After ADBE reported third-quarter earnings, the stock saw selling pressure due to investors’ concerns regarding slowing growth versus the previous quarter. However, Adobe continues to make strategic acquisitions, thus diversifying its product portfolio. The share repurchase program is also expected to have a positive impact on the stock long term.

Therefore, I believe this dip creates a great buying opportunity for long-term investors. So does Morgan Stanley analyst Keith Weiss, who raised his price target on Adobe to $736, assuming a 17% revenue CAGR from FY21-FY23.