Last month, I made a bullish call on Adobe Systems Incorporated (NASDAQ:ADBE), citing strength in its Software as a Service (SaaS) and cloud-computing businesses. However, I also believed that ADBE stock would endure some choppy trading conditions. At the time, the markets were digesting whether or not shares could continue outperforming.
The day after my article was published, we got our answer.
The ADBE stock price gapped up over 12%, buoyed by management’s optimistic outlook for 2018. All the back-and-forth that had previously occurred in the markets transitioned sharply into one, bold direction.
Even more startling, despite the ADBE stock price reaching an all-time high, shares continued to rise. Despite all the technical indicators screaming that the software and cloud firm is overbought, Wall Street apparently can’t get enough. Since the gap-up, Adobe has surged more than 7%.
All this translates to ADBE stock being up just under 79% year-to-date. I can hear some of my readers complaining: chop my hind end!
In my defense, I was expecting ADBE stock to move higher, but my perspective was based on a longer-term strategy. I had no idea what management would say, nor did I anticipate the strong market response, especially considering the robust gains in prior months.
Now, though, comes the difficult part. Major blue-chip companies and industry mainstays don’t make these types of giant moves frequently. After pocketing the victory and adding to my overall professional reputation, am I willing to double down on ADBE?
Again, I’m going to offer a small caveat: I don’t like price chasing, especially in regard to blue chips like Adobe. Still, I want to remain consistent. I stated before that ADBE stock “is about as automatic as you can get” in the technology sector. I remain confident, despite the recent price surge.
Strong Fundamentals Will Continue Driving ADBE Stock
Coincidentally, I’m not alone in my thinking process. InvestorPlace contributor Will Healy argues that buyers late to the game can still earn profits. It all boils down to the fact that Adobe is a competitive moat.
First off, the company’s SaaS business is a virtually guaranteed cash cow. Almost everyone uses Adobe-based software to safely and securely transmit documents and other media formats. Furthermore, they’re likely to maintain dominance due to their mutually beneficial relationships with their competitors. For instance, Microsoft Corporation‘s (NASDAQ:MSFT) Office 365 operates smoothly with Adobe applications. As I argued previously, the SaaS sector is not necessarily kill or be killed.
Moreover, switching from individual software distribution to offering the entire suite for a monthly subscription kills the piracy incentive. Now that professionals can have easy access to Adobe’s latest software updates for a nominal fee, the risks associated with pirated applications are no longer worthwhile. That’s amazing news for ADBE stock shareholders, which has had to deal with piracy’s negative impacts for decades.
Just as critical is Adobe’s push into cloud computing. According to data compiled by Forbes, experts anticipate a 19% compounded growth rate for cloud revenues. By 2020, this forecast translates to the sector pulling in $162 billion.
In addition, research firm Gartner predicts that SaaS firms throughout the world will rake in $75.7 billion by 2020. From this year’s projected haul of $46.3 billion, companies like ADBE can expect over 63% growth in their underlying industry over the next two or three years.
Of course, everyone wants to get into the cloud. The difference is that Adobe has the resource and capacity to take on the likes of Amazon.com, Inc. (NASDAQ:AMZN) and International Business Machines Corp. (NYSE:IBM).
The ADBE Stock Price Is Soaring for a Reason
While I believe in the tech firm’s long-term potential, I’m also realistic. Just recently, the ADBE stock price closed at another all-time high. If I don’t like chasing my investments, I certainly don’t like chasing them at record levels.
At the same time, we should also consider that this rally is in response to mid-September’s correction. For that month, ADBE stock lost a little over 4%. It was at that point when investors wondered if the markets would pull back from an already stellar year.
The answer, it appears, is that we have at least one month until the upcoming fourth quarter earnings report.
Naturally, I understand if buyers are hesitant and waiting for a pullback; it’s not a bad idea. However, you don’t want to get too cute with a stalwart like Adobe. It has an unbelievably vast array of software riches that consumers want and, in many cases, need. Plus, ADBE has positioned itself for tomorrow’s hottest sectors.
You can’t really do much better than that.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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