When it comes to companies with long, established histories that are also on the front edge of the digital transition, few have more to offer investors than Adobe (ADBE 0.22%). As a market leader in its industry, Adobe flies a bit under the investment radar but is part of the everyday lives of many people.
If you have ever opened a PDF document or edited a photo in Photoshop, you've used an Adobe product. The company has a lot to offer as an investment. Here are three reasons to buy Adobe stock in 2022.
Image source: Getty Images.
1. Strong and consistent financial performance
Adobe reported its fourth-quarter and fiscal year earnings in December. For 2021, revenue and operating income increased year over year by 23% and 37%, respectively. While net income decreased by 8%, this was primarily due to a one-time benefit from income taxes that positively affected the 2020 fiscal year, causing an unfavorable year-over-year comparison.
Adobe has two areas of strategic growth, Digital Media and Digital Experiences. The Digital Media segment is comprised of the creative products many consumers interact with, like Photoshop, Illustrator, and PDF documents. The Digital Experiences arm is focused on data-based tools for businesses. Of the two, Digital Media comprises 73% of overall revenue in 2021, up from 69% in 2019.
Regardless of the segment, Adobe makes its money on subscriptions, which comprised 92% of overall revenue in 2021, up from 86% in 2019. Recurring subscription revenue is important, as it has very little cost of revenue expense. This increase in the percentage of overall revenue that comes from subscriptions has helped Adobe improve its gross margin from 85% in 2019 to 88% in 2021.
2. Room to grow
The past success of the business should give investors confidence that with continued opportunity, Adobe should be able to execute. To that end, management thinks there's plenty of room to grow. The company believes the total addressable market (TAM) for its Creative Cloud products (Photoshop, Illustrator, etc.) is $63 billion. For reference, Creative revenue for 2021 was $9.6 billion. Similarly, management claims the TAM for its Document Cloud products (electronic signatures and more) is $32 billion. In 2021, Adobe recognized $2 billion in Document Cloud revenue.
Even if these projections turn out to be overly optimistic, it is still reasonable to assume there's plenty of green space for Adobe to continue to take market share and improve its products for consumers. Adobe is specifically looking to expand its creative offerings so they can be accessed anywhere. In one example, the company is working on a beta version of Photoshop that would work in a web browser. Adobe also made an important acquisition in this space when it agreed to purchase cloud-based video collaboration company Frame.io in October 2021.
3. Operating efficiencies and share repurchases
Further helping the financial performance of the business are the improving business efficiencies. Operating expenses as a percentage of overall revenue have decreased in each of the past two years, falling from 56% in 2019 to 51% in 2021. As it grows revenue, Adobe is showing its ability to keep costs in line, benefiting from its ever-increasing scale.
Perhaps more impressive is Adobe's share repurchase program. During this time of consistent revenue growth and price appreciation, the company has repurchased approximately $12 billion of its own shares since 2018. At the end of 2021, the company still had $13.1 billion of authority remaining on its share repurchase plan.
ADBE Shares Outstanding data by YCharts
With the exception of a dip in October, Adobe's stock price rose consistently in 2021. However, as of this writing shares are down 27% from their highs and are trading for 36 times forward earnings and 13 times forward sales. While not cheap, both of these multiples are the lowest they've been since April 2021.
Adobe is a leader in its space. It has decades of proven success, plenty of market share available left to capture, and a shareholder-friendly capital allocation plan. The fact that shares are trading for a discount is icing on the cake for anyone considering buying Adobe stock in 2022.
