Why Adobe Stock Could Be the Best Dip Buy in Tech Right Now

Key Points

• Adobe's new subscription model is similar to Microsoft's Office products and is aligned with today's digitized economy and content-driven society.
• The company's financials show that over 90% of revenue comes from subscriptions, enabling management to manage capital effectively.
• Based on this, Wall Street analysts see a double-digit upside in Adobe stock, and institutional capital is flowing in.

Investors have been focused on the technology sector for the better part of the past two years, with a particular interest in the new trends and themes happening in the world of artificial intelligence and developments in the next horizon of computing power. Within this trend, some popular stocks have performed very well through the past 12 months. However, not all rose with this higher tide.

In other words, there are stocks that deserve the same merit that names like NVIDIA Co. NASDAQ: NVDA and even Palantir Technologies Inc. NASDAQ: PLTR, yet haven’t gotten the same appreciation from the broader markets during the same period.

This is why it would be worth it to look into shares of Adobe Inc. NASDAQ: ADBE today, especially as they trade near a 52-week low.

The price level might worry some investors, who would be right to believe that a stock might be cheap for a reason. However, this time around, there are many factors at play under the hood of Adobe’s business model that would make it a potential buy and prove these bears wrong. These reasons will become clear in just a minute, and investors will be educated enough at the end of this analysis to consider adding Adobe stock for themselves.

A Monopolized Offer in Today’s Economy

The global economy is becoming more digitized by the day. As more jobs come online and businesses choose to move their operations inside the social media and digital realm today, Adobe’s suite of software offers will come into play for the economy of the next decade.

Whenever investors see a new advertisement on social media, a YouTube video, or a flyer from any brand online, chances are the employees behind this creation used some Adobe product to create it. Knowing that this offer is a monopoly due to name recognition and adoption through the market, Adobe's management decided to turn things around.

How? Adobe has now adopted the subscription model, and the latest quarterly financials show that over 90% of the company’s revenue comes through subscription payments. While some have critiqued this “lock-in” aspect of the brand, it is no different from Microsoft Inc. NASDAQ: MSFT and its subscription model for Office products.

Knowing this, investors can assume that Wall Street analysts have an easier job projecting Adobe’s financials into the future, as most of the revenue is somewhat guaranteed from its subscription model. Management can also effectively manage the company’s capital and achieve better returns on capital to drive higher prices.

Wall Street Likes Adobe Stock Now

All told, Wall Street analysts couldn’t help but keep their bullish outlooks on Adobe stock, especially as it now trades at 68% of its 52-week high prices. Those at Barclays decided to reiterate an Overweight rating for Adobe as of December 2024, this time placing a $645 valuation on the stock.

To prove these recent valuations accurate, Adobe stock would have to rally by as much as 44% from where it trades today, giving investors one of the best risk-to-reward ratios in the technology sector today. However, these valuations must have some financial backing behind them if markets are to act on them and buy the stock.

One of these backings comes from the company’s return on invested capital (ROIC) rates, one of the main drivers behind stocks that compound investor wealth. For Adobe, the ability to safely project and manage all the revenue that comes in allows management to achieve up to 31.6% in ROIC as of the past 12 months.

These analysts weren’t the only ones willing to make their bullish outlooks public. Adobe management decided to buy up to $2.5 billion worth of the stock during the past quarter, sending a message to the whole market that the stock may be cheap today, and who better to know than insiders themselves?

More than that, those from Geode Capital Management decided to boost their holdings in Adobe stock by as much as 1.4% as of November 2024. This end-of-year shopping spree brought their net position to a high of $5.4 billion today, or 2.4% ownership in the company.

Lastly, even bears know that Adobe stock should be nowhere but higher from where it is today, which is why investors can see the 10.9% decline in the company’s short interest over the past month alone. This is a clear sign of bearish capitulation in front of these developments for Adobe’s future.