3 Reasons Adobe Stock Is a Reopening Play

Like other technology and software stocks, Adobe Systems (ADBE 0.12%) had an epic 2020. Shares are up 37% since the start of last year -- including the recent pullback in tech stocks that has hit this digital-transformation company along with high-flying names that were overdue for a correction. And with widespread reopening of the economy in sight, Adobe stock has seemingly been cast aside in favor of companies in sectors that didn't fare so well last year (like travel, energy, and retail).  

Make no mistake, Adobe is tech, but it will also benefit a great deal as the global economy slowly normalizes. Here are three reasons this is a top software buy after the recent pullback in tech stocks.

1. Growth is still above the pre-pandemic pace

Adobe has been around a long time, but the company's growth story has been incredibly resilient. It has transformed itself into a leader in cloud software services and has supplemented its core platform with acquisitions, most recently the takeover of marketing management platform Workfront in December 2020.  

Image source: Getty Images.

Spanning creative tools to advertising to document management, Adobe is a top name in digital transformation. The company remained in growth mode throughout the worst of the pandemic as a result, even though many of its customers were deeply affected during the economic freeze. In fact, this software firm is still growing faster than it was before COVID-19 struck. It's clear Adobe has become a crucial component of organizations' IT and software operations around the globe, and that's not going to change once the coronavirus is beaten back.

Data source: Adobe. YoY = year-over-year.

Adobe is now lapping the initial effects of the pandemic a year ago, and its resulting sales trajectory is expected to remain over 20% in 2021. The "digital media" and "digital experience" segments are expected to increase a respective 23% and 20% in fiscal 2021. That implies a slight slowdown from the first-quarter pace just reported, but is nonetheless a more-than-respectable rate considering how large this software firm is.

2. Digital media isn't going anywhere

Digital media and experience revenue should in fact notch a healthy rebound as the world emerges from lockdown this year. After all, many of the creators who make heavy use of Adobe, like marketers, filmmakers, and engineers and architects, were put on hold in 2020. Activity in some of these realms will come back with a vengeance as consumer spending normalizes and businesses ramp up their activity to capture some of those dollars.

Case in point: Adobe said its creative software revenue grew at a 31% year-over-year rate in the first quarter to $2.38 billion (comprising 60% of total sales), and its Document Cloud segment (think PDF file management and electronic signatures) grew 37% to $448 million in the period. These growth rates could have real staying power in 2021 as economic activity comes back. Many professionals have grown accustomed to using digital tools like never before, and they aren't likely to revert to their old (and less efficient) methods of doing business again.

3. This is no overhyped tech stock

In spite of a stellar report to kick off its new fiscal year, Adobe stock is down some 16% from all-time highs as of this writing. It too was overdue for a breather, but this is no grossly overpriced software technologist with many years' worth of growth priced in. On the contrary, at 33 times trailing-12-month free cash flow, shares look like a downright reasonable deal right now.

Adobe is a disciplined spender, and like other software firms that are heavy on intangible assets, it has the ability to scale unlike any other business model around. Once software and the supporting infrastructure behind it are built and paid for, additional revenue generated from software usage goes almost entirely to the bottom line or generates cash the company can spend to expand further.

The result? Free cash flow climbed 39% in the first quarter to $1.71 billion -- a much faster rate than sales growth. Expect more of the same throughout the rest of 2021.  

Given this dynamic, Adobe stock looks more like a value stock than anything else. Poised to continue its long-term growth story, this looks like a top tech bet on the reopening of the economy right now.