Stocks to buy

Software equities have been major drivers of the multi-year rally by the technology sector. Microsoft (NASDAQ:MSFT) is not the only software name that’s contributed to that rally.  Adobe Systems (NASDAQ:ADBE) and ADBE stock have also contributed a great deal.

Source: Peteri / Shutterstock.com

To many folks, Adobe is known mostly for PDFs, Photoshop and Illustrator. While the latter products don’t scream “high tech” or “sexy.” there’s much more to ADBE stock. However, PDF is a table setter for Adobe, one that gives the company “one of the strongest franchises in software, benefiting from the secular shift towards digital marketing,” according to Morgan Stanley.

The bank has a $410 price target on Adobe, well above the shares’ current level of $352.

While PDF is a recognizable catalyst for ADBE stock, the company sits at the forefront of some other growing markets. Moreover, its Creative Clouds product is a disruptive concept that has helped the stock gain 34% over the past 12 months.

What the Data Says

Data confirms that Creative Cloud, where Photoshop and Illustrator reside, is a potential game changer for Adobe.

“”The data shows both growing adoption and increasing ARPU (average revenue per user) within the Creative Cloud base,” said UBS analyst Jennifer Swanson Lowe in a recent note to clients. “We see this sustaining high-teens revenue growth and EPS growth greater than 20%.”

Enterprise cloud computing usually gets most of the attention because heavyweights, such as Microsoft, Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN) loom large in that space. So it’s not surprising that Creative Cloud is unfamiliar to many investors. Adobe Creative Cloud offers tools for graphic and web design, photography, video and other applications, making it an essential, growing part of the booming gig economy.

In addition to Creative Cloud, there’s another massive opportunity for ADBE stock:  the Experience Cloud.

“Experience Cloud will have an addressable market of $84 billion by 2022 as content, data, analytics, commerce, and advertising blend together,” reports ZDNet.

Beyond the cloud, Adobe has an increasing footprint in the artificial intelligence/deep learning market via its Sensei platform. Using artificial intelligence, Sensei enhances photography and video editing, among other applications.

Sensei is such a hit that it’s featured on Apple (NASDAQ:AAPL) products, including the iPad and Mac computers.

The Bottom Line on ADBE Stock

As is the case with so many software stocks, Adobe isn’t exactly cheap. It trades at 30 times analysts’ average 2020 earnings per shares estimate and 15 times its trailing sales.. However, the company is one of the software names that offers the growth potential and profit-generating capabilities that justify those rich multiples.

The company is slated to report its fiscal first-quarter earnings on Mar. 12. If its revenue growth checks in above 20% and if the company sports operating margins of 30% or higher, its shares could rally.

With the combination of Adobe’s near-monopoly status and its penetration into rapidly growing markets, it may not be a stretch to say that its current price is attractive.

As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.

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