A good growth stock can be very valuable for an investor's portfolio, as the returns can be significant, especially when a company is able to consistently grow over the years. Adobe (NASDAQ:ADBE) is a great example of such a company, because it has been able to stay relevant and popular for many years. It's coming off an impressive quarter in which it saw sales rise by 24% year over year and net income rise by 19%. Those are some pretty strong numbers for Adobe, and that's just one reason why it's one of the best growth stocks out there. Here are the others.
There's a lot more growth to come
At more than 50 times earnings, Adobe is by no means a cheap stock today. But a big reason investors are willing to pay such a premium for it is that it has great potential over the long term.
For fiscal 2020, the company is projecting that its earnings per share (EPS), per generally accepted accounting principles (GAAP), will reach approximately $7.40. By comparison, the company's EPS over the trailing 12 months was about $5.66.
To put into perspective just how much growth that is, consider that in fiscal 2015, its EPS was just 1.24. That would mean that by the end of fiscal 2020, over the course of five years, its earnings would have risen by nearly 500%, good for a compounded annual growth rate of 43%. And as impressive as that is, there's little reason to expect that Adobe will run out of growth opportunities anytime soon.
The company is not only looking to continue to innovate new products and services for its customers, but it's also looking at more opportunities to monetize its business. One way that Adobe has done so is by shifting to a subscription model for its products. Rather than buying them, consumers and businesses buy licenses that they renew. It's a good way for Adobe to lock in some recurring revenue, and it creates more upsell opportunities along the way.
While for some it may seem a more expensive route to take given that you probably don't need to buy a new version of Photoshop every year, there's an important reason Adobe can get away with this.
Its brand is second to none
When it comes to image editing, Adobe is the name users recognize as the cream of the crop in terms of software. With Illustrator, Lightroom, and many other programs, Adobe has created a strong portfolio of products that can fill many different needs for creative professionals.
It is estimated that as many as 15 million users subscribe to Adobe's Creative Cloud service, which includes programs like Photoshop and other big-name products. Adobe estimates that by 2022, the number of potential users of its products could rise to 45 million, with 10 million of those being students in creative majors and 35 million being what it calls "creative pros."
In addition, another area that has been particularly successful for Adobe is its business-facing offerings, helping companies with their marketing and analytics. In Adobe's experience cloud segment, which contains many marketing technologies, the company estimates that among its top 100 customers, close to 90% use three or more products, which is up from just 66% back in 2015. During that time, annual recurring revenue has also increased from $3 million to $6 million.
Key takeaways for investors
Adobe still has a lot of growth planned, and it doesn't look to be slowing down anytime soon. And selling customers experiences rather than just products could pave the way for even more opportunities to add value. Investors might be paying a premium for the stock today, but it could be well worth it; over the past five years, shares of Adobe have soared by more than 300%.
Strong profits, lots of recurring revenue, and some great growth opportunities ahead make Adobe a growth stock that could be ideal for all types of investors.