Adobe is a screaming buy, this portfolio manager says

It’s tough to buy into a market that continues to slide, even more so when the names you’re looking at are part of a sector (technology) that investors of all stripes are leaving by the boatload. But when a great company goes on sale, you should be buying. That’s the logic behind Barry Schwartz’s call for Adobe Systems (Adobe Systems Stock Quote, Charts, News, Analysts, Financials NASDAQ:ADBE) to be one of his top picks for the upcoming 12-months.

“We’re excited to own shares of Adobe here,” says Schwartz, chief investment officer at Baskin Wealth Management, who nominated Adobe to his Top Pick list in a BNN Bloomberg segment on Thursday.

“This is brand new. We just bought it for our growth portfolio and for our growth clients. We’ve been watching it for a long time, and the stock was way too expensive. It has finally dropped to around 25x earnings with four per cent free cash flow yield, and we said, ‘Oh my god, we can buy one of the top five greatest businesses the world has ever seen at at a very inexpensive multiple here,’” Schwartz said.

Digital media software giant Adobe has watched its share price drop from the high $600 region in November, 2021, to now in the low $400s — that’s about a 36 per cent drop in value in a little over six months. The decline is nothing special within a tech field where stocks have been falling across the board amid concerns over rising interest rates, continued supply chain issues and uncertainties surrounding post-pandemic economies. 

For its part, pared back guidance in recent quarters looks to have aided in ADBE’s drop-off. In December, it was worries about a slowing trend in consumer spending as well as foreign exchange concerns which drew headlines with the company’s fiscal fourth quarter results, while in March one contributing factor was the company’s decision to cut sales in Russia and Belarus as a result of the war in Ukraine. The result was similar both cases, as ADBE shares dropped by about ten per cent on the earnings releases.

But management has been adamant that the business is doing very well and continues to reap the benefits of moving to subscription fees for its popular programs as well as the broader and ongoing digital transformation that’s putting more and more emphasis on digital-first creation and communication.

For Schwartz, Adobe should be attractive to investors for its rock-solid hold on its markets along with the company’s growth potential in the digital age.

“Adobe, for those who don’t know, is the Creative Cloud subscription-based software that it sells. This is an irreplaceable asset,” Schwartz said. “40 million users and potential users of it to make marketing materials, video games, rendering — everybody’s a creator now [with] YouTube and Tik Tok, etc. And it’s not something that you can learn in one day. You go to school for it and there are large community groups for it.”

“And why it’s such a great business is the Creative Cloud, which I think has about 90-plus per cent gross margins and it costs them nothing to bring on a new customer. And there’s untucked pricing power. I think Adobe charges $50 a month so there’s potential for that to go a lot higher over the long term. So, a great, great business,” he said.

Adobe hit record revenue in its first quarter 2022, delivered in March, where the company’s topline saw nine per cent year-over-year improvement to $4.26 billion. The increase was led by its Digital Experience segment at $1.06 billion, up 13 per cent year-over-year, and Digital Media, up nine per cent to $3.11 billion. (All figures in US dollars.)

Cash flows from operations for the Q1 were $1.77 billion while the company continued its share buyback plan by repurchasing about 3.8 million shares over the quarter. 

Commenting on the quarter in a CNBC segment in March, Adobe CEO Shantanu Narayen said the fundamentals of the business remain extremely strong and he emphasized that on an adjusted basis, revenue growth for Digital Experiences was a larger 22 per cent while its document cloud business was 26 per cent year-over-year. 

“As far as we’re concerned, we had a great Q1,” Narayen said on March 23 segment.

These days, the hate-on for Big Tech shows little signs of ending, but Schwartz says investors should be concentrating on buying great companies at good prices.

“Everyone is saying, ‘Get me out of tech! Let’s buy oil, let’s buy this and that,’ — people are not thinking about businesses, they’re thinking about factors. Let’s think about businesses, and this is one of the best and it’s now very attractive for what it offers,” Schwartz said.