The S&P 500 Information Technology index is down nearly 14% from its high. That steep decline reflects Wall Street's uncertainty regarding the future of the economy. Many investors are worried that, with inflation at a 40-year high and geopolitical conflict threatening to push prices even higher, the Federal Reserve will tighten its monetary policy too quickly, sparking a recession.
The situation is undoubtedly complex, and a recession is certainly possible in the coming months. But unless you have a crystal ball that can predict the beginning and end of that downturn, your best bet is to buy and hold through the ups and downs. Missing just a few good days in the market can dramatically affect your long-term returns.
With that in mind, let's see why now is a good time to invest in beaten-down blue-chip companies Netflix (NFLX -3.92%) and Adobe (ADBE 0.89%).
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1. Netflix
Streaming pioneer Netflix continues to hold its own despite increasing competition. In the past few years, Walt Disney and Apple have launched premium streaming services, alongside offerings from Warner Bros. Discovery (HBO Max), Comcast (Peacock), and others. Yet with 222 million paid memberships, Netflix still outranks its rivals. The next closest competitor is Disney+, with nearly 130 million subscribers.
That gives Netflix an edge. With more viewers on its platform, it has access to more data about consumer preferences. Using that information, Netflix leans on artificial intelligence to surface insights that inform content acquisition and production decisions.
Does that actually make a difference? It sure looks that way. In terms of ratings, Netflix currently has nine of the top 10 acquired series, seven of the top 10 original series, and six of the top 10 original movies, according to Nielsen. Better yet, Netflix held 47% global market share in terms of demand for original content in 2021, according to Parrot Analytics. The next closest competitor was Amazon Prime Video, with a 12% market share.
Financially, Netflix grew its revenue 19% to $29.7 billion in 2021, driven by a 9% uptick in paid members and a 7% uptick in average membership price. On the bottom line, it generated negative free cash flow (FCF) of $159 -- a result of anticipated content-related expenses -- but management believes the company will once again be FCF positive in 2022 and beyond.
Netflix still has room to grow its business -- that's especially true in its less penetrated markets, including Latin America, Asia-Pacific, and Europe, Middle East, and Africa. In addition, if Netflix continues to produce viral hits like Squid Game and Bridgerton, its pricing power should continue to grow. And with its valuation bouncing off a five-year low -- shares currently trade at 5.5 times sales -- this growth stock looks like a bargain.
2. Adobe
Adobe is one of the world's most diversified software companies. Its digital media segment comprises a suite of applications for designing and editing creative content and digital documents. Many of those tools -- Photoshop, Premiere Pro, Acrobat -- have become the gold standard in their respective industries. Adobe has also kept pace with new trends through applications for augmented reality and 3D content creation, both of which could make it a key player in the metaverse.
Adobe's digital experience segment is a complementary suite of applications for analytics, marketing, and commerce. Those tools help clients use creative content to deliver targeted marketing campaigns and personalized shopping experiences. While the company faces stiff competition from rivals such as Salesforce.com, research company Gartner named Adobe a leader in digital experience in January. Gartner also recognized Adobe as a leader in multichannel marketing and digital commerce in 2021. Those accolades have come alongside solid financial results. Revenue rose 18% to $16.1 billion over the past year, and free cash flow rose 18% to $6.8 billion.
Looking ahead, management puts its market opportunity at $205 billion, which includes $95 billion from digital media and $110 billion from digital experience. To capitalize on that opportunity, Adobe is working to reinforce its competitive edge in both spaces. That includes making its creative tools more collaborative. Adobe acquired cloud-based video collaboration platform Frame.io in 2021, and it's integrating those capabilities into its own industry-leading tools for video editing (Adobe Premiere Pro) and cinematic special effects (Adobe After Effects). Likewise, Adobe is beta-testing a Web-based version of Photoshop that enables creators to make edits and collaborate through their browsers. On the digital experience side, Adobe is working to accelerate workflows and improve content personalization with its artificial intelligence engine.
Here's the bottom line: Adobe is a leader in digital media and digital experience. The breadth of its portfolio differentiates it from the competition, and right now, this growth stock looks like a bargain. Shares are trading at 13.2 times sales, cheaper than the five-year average of 15.3 times sales.
