The stock price of Adobe (ADBE -0.27%) fell 8% last week and is now down 37% from its all-time high as Adobe's first-quarter fiscal 2022 earnings release and full-year guidance disappointed Wall Street.
The company grew diluted earnings per share by 5% compared to the year-ago period and revenue by 9%, which is considerably slower than the growth rate Adobe investors are used to. For example, it grew revenue by 23% between fiscal 2021 and fiscal 2022.
What's more, the company is guiding for just 13% revenue growth in the second quarter of fiscal 2022 compared to a year ago. All eyes are on Adobe's top line, but investors should focus more on the strength of the core business and profitability. Here's why Adobe is my top growth stock to buy in April and beyond.
Image source: Getty Images.
A maturing business
If you think that the market for photo, video, graphic design, illustration, website, video game, and social media editing will increase, then chances are Adobe is an investment thesis you can get behind.
Last week's stock sell-off seemed to be mainly due to slowing growth. But like other large tech companies, it is transitioning from a high growth rate to a business more centered around profitability.
Adobe is a much more mature company now than even five years ago. Just like Apple, Microsoft, or Alphabet, Adobe's revenue growth shouldn't be the most important metric anymore. Rather, investors should focus on its growth in earnings and free cash flow (FCF).
A cash cow
Five years ago, Adobe generated $1.2 billion in net income, $2 billion in FCF, and had an operating margin of 26%. In fiscal 2021, Adobe generated $4.8 billion in net income, $6.9 billion in FCF, and had its highest operating margin since 2004 at 36.8%.
ADBE revenue (annual). Data by YCharts.
This performance indicates that Adobe is generating more profit from its sales even though it is a much larger business now than it used to be. Adobe is a well-oiled cash machine that is as profitable as ever.
An enterprise staple
It's the kind of company you could describe as an enterprise staple. Similar to Procter & Gamble, which provides staples for consumers, Adobe's products are, at this point, essentials in business, in college and high school classes, and for the ever-growing gig economy.
While Adobe does have its competitors -- such as its Premiere Pro video editor versus Apple's Final Cut Pro X, or products made by the European company Affinity -- it remains the undisputed leader in its field. The company's rich FCF generation allows it to buy back its stock, organically grow its business, or pursue mergers and acquisitions.
Extra cash is an even bigger advantage in a rising interest-rate environment. Growth companies that depend on capital markets to finance their business have less flexibility than Adobe. Simply put, it can afford to take risks and have ideas not work out, while a smaller competitor has less slack to work with.
A good buy now
Getting a bargain on Adobe stock is hard because the business is really good, and a lot of people know that. However, new investors can take solace knowing that Adobe stock is down nearly 40% from its all-time high and hovering around a 52-week low.
There are faster, higher-growth companies on the market. But for risk-averse investors looking for a quality tech stock they can count on, Adobe stands out as one of the best options out there.
