Adobe stock could double in five years, this investor says

Tech stocks are getting beat up these days as investors cash in on some of the sector’s big gains over the past year. That trend certainly applies to software giant Adobe Systems (Adobe Systems Stock Quote, Chart, News, Analysts, Financials NASDAQ:ADBE), which posted a big return in 2020 but has been pulled back of late — which is all the more reason to buy the stock, says Rob Lauzon of Middlefield Capital, who contends there’s lots of upside to Adobe if you stick around for a while.

“I can see this stock doubling in maybe five years,” said Lauzon, managing director and deputy chief investment officer at Middlefield, who spoke on BNN Bloomberg on Tuesday.

“Adobe is growing at a double-digit clip —it’s a mega-cap software company, so it’s not growing like the mid-cap software companies at 30, 40, 50 per cent a year but it’s growing at 15 per cent a year. And the company is continuing to buy back shares,” Lauzon said.

One of the legacy tech names from the 1980s and 90s, Adobe is the best-known creativity software company worldwide with programs such as Photoshop and Acrobat along with a suite of publishing and customer experience management software. Adobe may be old but it hasn’t rested on its laurels, having done an admirable job at carving out its niche in the ongoing digital transformation. The company has nicely expanded its cloud business and overall Digital Experience segment, for example, which now represents about one quarter of the company’s revenue.

And like a number of tech names, the COVID-19 pandemic provided an unexpected lift to Adobe, whose products have been flying off the virtual shelves as businesses look to shore up their digital and e-commerce capabilities.

“As the undisputed leader in three growing categories – creativity, digital documents and customer experience management – we are well-positioned to capture the massive market opportunity ahead of us in 2021 and beyond,” said Shantanu Narayen, president and CEO, in the company’s fourth quarter fiscal 2020 press release on December 10.

Adobe finished its fiscal 2020 achieved 15-per-cent year-over-year revenue growth, while for the fourth quarter revenue was up 14 per cent to $3.42 billion. Digital Media, the company’s largest segment at almost 70 per cent of its business, grew by a full 20 per cent in the Q4 to $2.50 billion. Adobe’s earnings for its fiscal 2020 Q4 beat analysts’ estimates, coming in with an adjusted EPS of $2.81 per share compared to the consensus call for $2.66 per share. The $3.42-billion topline was also better than the expected $3.36 billion. (All figures in US dollars.)

Fans of Adobe like to point to the stickiness of its products where the time investment needed to learn the ropes of creativity software makes switching companies and products that much less likely, and with Adobe’s brand power along with its strong marketing push for early adoption, the staying power of programs like Photoshop and Illustrator is huge.

“Adobe is really entrenching itself in corporations but also for small businesses and people starting businesses at home and the creativity it provides,” said Lauzon. “It’s a cornerstone software stock, similar to Microsoft, in our view.”

“Adobe has had a good run over the last couple of years and many of these stocks are settling back here so you might get a chance to buy it on a pretty good pullback, near term, and I would have a five-year outlook and I think you’ll be pretty happy with a pretty solid investment on the technology side,” Lauzon said.

A steady climber for years now, Adobe turned it up a notch in 2020, finishing the year up 51 per cent. So far in 2021, the stock is down almost nine per cent.

On the fiscal year ahead, management delivered positive guidance in its Q4 report, calling for fiscal Q1 revenue up 20 per cent year-over-year, Q2 revenue up 19 per cent and Q3 revenue up 17 per cent. What’s more, the company’s growing cash flow from operations ($1.8 billion in the fiscal Q4) has helped boost Adobe’s share buyback program to where it plans to repurchase up to $8 billion in stock through to fiscal 2024.

Portfolio manager Paul Meeks of Independent Solutions Wealth Management said Adobe’s prospects look good, as the company has built-in resilience and little in the way of obstacles to growth.

“Here’s a company that spearheads digital marketing campaigns. And, of course, they were on fire with very aggressive revenue growth before COVID,” Meeks said in conversation with CNBC in October. “But the world I see after COVID will only emphasize that more.”

“I still think that out of all the tech majors, this is probably the one that still has ample upside to the price target, which I still think is either ten, 20 or 30 per cent higher than its current price,” Meeks said.