Software companies have positioned themselves in a unique place over the past decade. Instead of offering a yearly product license that customers may or may not renew annually, software companies have pushed the subscription pricing model onto clients. This creates more consistent cash flows, making companies more efficient.
Two of my top software companies are Adobe (ADBE 0.87%) and Autodesk (ADSK 0.71%). Each provides vital software for its target audience and has successfully pivoted from a license to a subscription model. Read on to find out more about why these two companies make fantastic buys now.
Both companies offer vital products to their clients
Adobe and Autodesk make software for a specific audience. Adobe's creative design suite is utilized by almost everyone in the graphics design field, but it also has other products for marketing, e-commerce, and e-signature. Adobe is also a dark-horse artificial intelligence (AI) stock, as it is working to integrate AI into its products to assist users.
Autodesk's software is primarily for architects and engineers, and has tools products like AutoCAD, Inventor, and Revit within its product offering. It also has an ancillary offering that can be used to create 3D animations for films, video games, or even a museum building being pitched during the bidding process. Regardless, Autodesk provides software utilized daily in different fields. While there are some alternatives, switching is a significant hassle and likely expensive.
Customer dependence is a key part of Adobe and Autodesk's investment thesis, as those customers could not live without the software. As a result, each company is fairly recession-proof, as its clients will need to renew their subscriptions each year, even if workflow is down. This doesn't mean these two will grow rapidly during a recession, either, as Adobe and Autodesk still need to maintain a positive relationship with their customer base. But they will almost certainly produce slight growth quarter after quarter regardless of economic conditions.
Each company can put up consistent growth but is also massively profitable.
Adobe and Autodesk are attractive investments right now
Part of the allure of investing in software companies is their margins. Because there are relatively small input costs for producing software once it has been created, companies can deliver outstanding margins.
ADBE Operating Margin (TTM) data by YCharts
Higher margins lead to more profits, so software companies often trade at a premium to other stocks. Adobe and Autodesk are no exception to this rule; each trades at a fairly expensive trailing price-to-earnings (P/E) ratio.
ADBE PE Ratio data by YCharts
However, the forward-looking P/E ratios don't look nearly as pricey and fall in line with many other stocks in the market right now. As a result, I think Adobe and Autodesk make two great purchases for your portfolio. Each company has reached a mature level and brings balance to a portfolio that may be filled with high-flying, unprofitable stocks. While these two won't be your next ten-bagger, they will consistently deliver strong returns and allow you to crush the market over the long term.
ADBE Total Return Level data by YCharts
With each stock trading at a reasonable valuation, long-term investors should consider adding them to their portfolio today.
