Adobe Systems (NASDAQ:ADBE) is a titan in the software industry, and the stock has been a long-term winner, up 100% in the last three years and 400% in the last five years. In both cases, those gains beat the S&P 500 by a wide margin.

However, past performance is no guarantee of future returns. And the stock has struggled over the last 12 months, which may have investors wondering: Is this tech company still a good investment? Let's take a look.

A growing market opportunity

For decades, Adobe has been the dominant player in the creativity software market. Whether you need to edit an image, design a mobile app, create graphics for social media, or add special effects to a Hollywood blockbuster, Adobe Creative Cloud has the tools to make it happen. More importantly, applications like Photoshop, Illustrator, Premiere Pro, and After Effects are virtually unrivaled in terms of market share.

Woman typing at a computer.

Image source: Getty Images

Adobe has had similar success with Experience Cloud, a suite of software and services designed for data scientists and marketers. At its core is Adobe Experience Platform, a tool that transforms data into real-time customer profiles. This allows marketers to create personalized experiences across digital channels. At the same time, data scientists can connect and analyze cross-channel data to drawn insights, tweak content, and drive customer engagement.

Notably, research firm Forrester recently recognized Adobe as the leading provider of enterprise marketing software, though Salesforce is close behind.

In total, management estimates Adobe's market opportunity will reach $147 billion by 2023, up from $83 billion in 2020. Put another way, Adobe's massive market opportunity is growing at 23% per year.

An impressive track record

Enterprises are accelerating their adoption of digital solutions. In fact, the International Data Corp. (IDC) estimates that businesses worldwide will spend $6.8 trillion on digital transformations between 2020 and 2023. That trend has been and should continue to be a powerful tailwind for Adobe's business.

Even so, the company isn't resting on its laurels. Adobe continues to innovate and build its portfolio, focusing in particular on mobile use cases, new forms of media, and artificial intelligence. For instance, Photoshop Camera is a smartphone app that provides an array of filters and AI-powered features. And Adobe Aero allows artists to design in augmented reality.

Person holding tablet, above which is a digital representation of a brain.

Image source: Getty Images

Additionally, Adobe Sensei is an AI framework designed to infuse its software platforms with intelligence. Powered by NVIDIA GPUs, Sensei automates tasks for creative professionals, helping them work more efficiently. Sensei also helps marketers personalize content through predictive analytics and workflow automation.

These innovations have created strong demand for Adobe products, and the company has consistently delivered impressive financial results.

Metric

2015

Q1 2021

CAGR

Revenue

$4.8 billion

$13.7 billion

22%

Free Cash Flow

$1.3 billion

$5.8 billion

33%

Data source: Adobe SEC filings. TTM = trailing-12-months. CAGR = compound annual growth rate.

Beyond being generally impressive, investors should note two things about these financial metrics: First, Adobe's revenue is growing more quickly than its market opportunity. If the company can maintain that momentum, it should gain market share in the years ahead.

Second, free cash flow is growing more quickly than revenue, meaning the company is becoming more profitable. A few things are driving that trend: In 2015, 67% of Adobe's revenue came from subscription fees, but that number hit 90% last year. As a result, gross margin jumped from 84% to 87% over that period.

Additionally, roughly 61% of Adobe's top 100 customers used three or more products in 2015, but that number reached 93% in 2020. It's typically cheaper to upsell existing customers than to acquire new customers. That's why operating margin expanded from 19% to 33% over that period.

The verdict

Strong financial performance is great, but it's always smart to ask yourself if the performance is sustainable. In this case, Adobe has a massive market opportunity, and its strong brand name, global scale, and best-in-class solutions give the company a significant advantage. From that perspective, Adobe has a long runway for growth.

So, is this stock a buy? I think the answer is yes. But as always, invest with a long-term mindset and don't go all in at once -- buy in slices over time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.