Should You Buy the Adobe Stock Dip to Kick Off 2022?

Up until just a few weeks ago, Adobe (ADBE 0.89%) was handily beating 2021 year-to-date returns of the S&P 500. Then an analyst downgrade, followed by a "disappointing" company outlook for 2022 changed that. Shares of the creative software leader are now sporting just a 13% gain in 2021 with a few weeks to go until the new year.

Adobe has been a fantastic long-term buy-and-hold stock, compounding double-digit revenue and earnings growth for years, but it's now cheaper than it has ever been in the pandemic era. Here's why the stock could be a timely buy for investors who favor a good value.

Image source: Getty Images.

Fiscal 2022 arrives with a whimper

In Adobe's fiscal 2021 fourth quarter (the three months ended Dec. 3, 2021), revenue grew 20% year over year to $4.11 billion, and adjusted earnings per share (EPS) were up 14% to $3.20. Both figures slightly outperformed guidance capping off a great 2021 as Adobe lapped the depressed financials from early in the pandemic.

Data source: Adobe.

However, in spite of the solid earnings beat, Adobe stock has declined 17% in the last month. Why? A couple days before the earnings news, one analyst downgraded the stock to "neutral" for 2022, citing limited upside for the stock. As if to confirm the outlook, Adobe issued guidance for the new year that indicates a slowdown is coming. Management said to expect revenue of $17.9 billion and adjusted EPS of $13.70 -- implying growth of just 13% and 10%, respectively.

Perhaps of extra concern is that Adobe has made two acquisitions in the last year, the first being marketing workflow management outfit Workfront, and the second being video collaboration platform Frame.io. As important as digital content creation has become these days, many investors were expecting more from Adobe's own organic growth paired with these recent additions.

A steal of a deal on a long-term winner?

Based on management's outlook for fiscal 2022, Adobe stock now trades for just shy of 41 times earnings per share. This past year, when the company was growing its bottom line well into the 20% year-over-year range, a premium price tag of 40 to 50 times adjusted earnings was deemed acceptable. But given the anticipated cooldown, perhaps that's not so true now.

Nevertheless, let the record reflect Adobe sandbagged expectations for fiscal 2021. Full-year revenue and adjusted earnings per share were a respective 4% and 11% higher than originally forecast last December. So perhaps the outlook for 2022 will also be better than projected. Also not included in the current forecast are any new acquisitions, which Adobe could certainly afford to make since it has $5.8 billion in cash and short-term investments offset by just $4.1 billion in debt.

Or perhaps Adobe's days as a 20%-plus growth enterprise are indeed over, although one could also have argued that back in 2019, before the pandemic started, right before the company's trajectory accelerated again. Nevertheless, this software giant should remain a steady expansionist for quite some time. It provided some longer-term updates with the latest earnings take showing its slice of the upcoming $10 trillion digital transformation pie will be a hearty serving.

Specifically, Adobe cited a report from tech researcher IDC that updates the amount of annual global spending on software Adobe addresses with its three primary segments -- creative cloud, document cloud, and experience cloud. Previously, IDC expected spending on software in these areas to be $147 billion by 2023. Now, IDC thinks that figure will be $205 billion by 2024. Clearly, there's plenty of room for Adobe to elbow in on more market share in the next few years.

Of course, though Adobe is a unique cloud-based software suite, there are other firms out there with competing tools that could end up being even better investments. These include Autodesk, Unity Software, Salesforce.com, or DocuSign -- and even NVIDIA, with the recent commercial launch of its Omniverse software.

For now, though, Adobe is still the champion of creative software. Its track record of steady revenue and profitability growth is poised to continue in 2022. And given the fast-growing importance of web content creation, there will be plenty of room for Adobe to flex its muscle in the years ahead. If a company gradually maturing into value stock status is what you want, and you were waiting for a pullback to buy this long-term winner, now seems like a pretty good opportunity to give it another look.