If you’ve followed along with me for any length of time at all then you know I’m a big believer in cloud computing.
And it’s not just because the global market is growing at 21.4% a year and will be worth $185.8 billion by 2024, according to KBV Research.
It’s something far more fundamental. A well run firm that uses the cloud to deliver software as a service (SaaS) have two things that hardware companies can only dream about.
The first is high profit margins. The second is even better – recurring revenue. Literally the money just rolls in month after month after month.
Here’s the thing; companies that have made the move from software publishing to the cloud can really clean up.
That’s really important now because after the bear-market rout, companies and investors alike are taking a shine to liquidity.
As a creative professional, I have been following Adobe Systems Inc. (ADBE) for more than 30 years.
As a former musician, I would have artwork designed for my CDs and also need to have photographs professionally edited and color corrected. And as a journalist, I knew that the software the firm developed played an integral role in desktop publishing.
The company is highly regarded for such products as Illustrator for creating, editing, and managing graphics as well as Photoshop for managing and editing pictures.
Back in 2009, Adobe quietly began moving from a sales model to a de facto “rental” model. Users pay ongoing monthly fees to gain access to a range of product delivered via the Web, or “the cloud.”
But it has hardly rested on its laurels. Back in 2018, Adobe
Bought the privately held firm, Magento Commerce for $1.68 billion. That moved Adobe from a focus only on digital content management and related analytics into e-commerce
At the time of the merger, Magento said it handled more than $150 billion in gross merchandise volume. By contrast, that is nearly twice as much as eBay Inc.’s (EBAY) $88.4 billion in 2017, according to data from FactSet.
Let me show you why I say all this by running ADBE through the five filters we use to screen stocks that can truly help you build your wealth. Take a look:
Tech Wealth Rule No. 1: Great companies have Great Operations.
These are well run firms with top-notch leaders.
One way you can judge that is by taking a look at key partners. And Adobe is working closely with one of the world’s best cloud services firm, Microsoft Corp. (MSFT).
Microsoft ranks second in cloud hosting behind Amazon Web Services. Back in December, the two announced a sweeping alliance. Adobe Experience Cloud and Adobe Document Cloud integrate with Microsoft’s Dynamics 365, Office 365, LinkedIn, and Azure cloud infrastructure services.
The move gives Adobe access to 180 million of Microsoft’s commercial customers. Adobe has said it’s getting a “phenomenal response” for the Microsoft integration.
Tech Wealth Rule No. 2: Separate the Signal From the Noise.
To create real wealth, you have to ignore the hype and find companies that have rock-solid fundamentals.
The market’s wild panic over the spread of the coronavirus amid saturation media coverage hammered stocks across the board. Lost in all the noise is the fact that this is an incredibly well run firm.
It has pre-tax profit margins of 39% and the exact same figure for return on stockholders equity. Not only that, but it generates nearly $3.6 billion in free cash flow.
Tech Wealth Rule No. 3: Ride the Unstoppable Trends.
Look for stocks in red-hot sectors because they offer the best chance for life-changing gains.
Earlier I noted that overall cloud sales are growing at 21.4% a year. At that rate they are doubling 3.4years. So, Adobe has focused on a market that is clearly part of a very long term trend.
The firms says that when you add up of all of its various services, its total addressable market will be $80 billion at the end of this year. That’s actually more impressive than it sounds.
Back in 2009, it had zero cloud sales. Last year, revenue totaled nearly $11.2 billion, much of it focused on the cloud.
Tech Wealth Rule No. 4: Focus on Growth.
Companies that have the strongest growth rates almost always offer the highest stock returns.
Over the past three years, Adobe has grown its sales an average 24%, meaning they are doubling roughly every three years. But it did even better in its most recent quarter, with sales rising 33% from the year-ago period.
At that rate, sales could hit $22.4 billion by the end of 2023. By 2026, they could come in at a stunning $45 billion.
Tech Wealth Rule No. 5: Target Stocks That Can Double Your Money
This is where we look at the firm’s earnings growth and see how long it will take to double profits. By doing that we can figure out how long on average it should take for the stock to roughly double.
I’ve gone through the firm’s financials in detail and I’m projecting earnings per share will grow by an average 30% over the next three years. Bear in mind that this is a very conservative approach.
See, over the past three years the firm has had an average 37% growth in earnings per share. That figure fell slightly in the most recent quarter to 33%. To take a more cautious approach, I cut the rate back to 30%.
Now we use what I call my doubling calculator. Mathematicians call it the Rule of 72. Let’s divide the compound profit growth rate of 30 into the number 72. We find that it should double in about 2.4 years.
In the year ended February 19 when ADBE hit its recent high, the stock was up 48.7%. By contrast, the S&P 500 did less than half as well, coming in at 21.8%.
Add it all up and you can see that this is the type of quality tech leader that at the very least should be on your watch list.
Remember, when you decide to enter the position, start with a small stake and add to it over time as the stock once again resumes its status as a market leader.
It’s impossible to tell when that might be, but when times are uncertain, it can pay to be prepared, and have some expert insights on your side.
That’s why I also wanted to let you know that Andrew Keene, a man who first made his fortune in trading during the 2008 housing crisis, is ready to share his strategies for potentially making money during the coronavirus crisis.
All you have to do is click here to check out what he has to say.
Cheers and good investing,
Michael A. Robinson