The S&P 500 Information Technology index is down 24% from its high, putting the sector in a bear market. But over the last decade, the index is still up 404%, easily outpacing the 193% return of the broader S&P 500. That data makes a strong case for adding at least a little tech exposure to your portfolio.
With that in mind, Adobe (ADBE 0.89%) and Cloudflare (NET -0.23%) look like two smart long-term investments. Here's why.
Image source: Getty Images.
1. Cloudflare
Cloudflare operates a global cloud platform. Its portfolio includes an array of application, network, and security services, which collectively help its clients accelerate and protect their IT ecosystems. The company also provides developer tools that make it possible to build and deploy applications and websites directly on its low-latency, high-security network.
Cloudflare's vast infrastructure is one of its key advantages. The company has servers in 270 cities across more than 100 countries, and its platform interconnects with over 10,500 other networks. What does that mean? It means Cloudflare is fast. Internal studies have shown that its cloud platform can consistently outperform that of other vendors, including tech giants like Alphabet and Amazon. And Forrester Research recently recognized Cloudflare as the best edge development platform on the market, citing a strong current offering and a stronger growth strategy.
That competitive edge led to another round of impressive financial metrics in the first quarter. Paying customers rose 29% to 154,000, and the average customer spent 27% more. Revenue surged 54% to $212 million, and the company generated a non-GAAP (adjusted) profit of $0.01 per diluted share, up from a loss of $0.03 per diluted share in the prior year. That may not seem impressive, but management plans to run the business at breakeven in terms of profitability. With an $86 billion market opportunity, it makes sense to invest aggressively and reinforce its competitive edge.
Valuation makes Cloudflare the riskier of the two stocks discussed in this article. Even after dropping 74%, shares still trade at a pricy 27 times sales. However, the stock is cheaper today than it has been at any point in the past year. And given Cloudflare's financial track record and strong competitive position, I think this tech stock is worth buying.
2. Adobe
Software giant Adobe is a key enabler of digital transformation. Its digital media portfolio includes a suite of creativity software, and many of its products have become the gold standard in their respective industries. That includes Photoshop for image editing, Premiere Pro for video editing, and Illustrator for vector graphics. Adobe's digital media segment also includes Acrobat, a ubiquitous application for creating, editing, and sharing digital documents.
Likewise, on the digital experience side, Adobe offers solutions for analytics, marketing, and commerce. Those tools help organizations engage and delight consumers with personalized content. While Adobe is best known for its creativity software, many products on this side of the business are equally pervasive. For instance, Forrester Research recognized Adobe as a leader in enterprise marketing software in 2021, and Gartner ranked Adobe as a leader in digital experience platforms in 2022.
In short, Adobe provides two complementary suites of software that collectively facilitate the creation and delivery of digital content. Better yet, the company has achieved a strong competitive position in a number of different markets. That has translated into strong financial results. In the past year, revenue rose 18% to $16.1 billion, driven by double-digit growth in both digital media and digital experience, and free cash flow climbed 18% to $6.8 billion.
Going forward, the company puts its addressable market at $205 billion by 2024. Adobe is well-positioned to capitalize on that opportunity. Its lineup of industry-leading products and its capacity for innovation should drive growth for many years to come. And with newer creativity tools like Substance for 3D design and Aero for augmented reality, Adobe could even be a key player in the multi-trillion-dollar metaverse industry. That's why this growth stock is a smart buy today.
