Strong fundamentals pushed Adobe stock to record highs in 2015
Adobe’s (ADBE) successful switch to a web-based subscription model from traditional licensed software has benefitted its share price, as the subscription business model leads to more predictable recurring revenues. As the below share price chart shows, Adobe’s stock had a successful year in 2015. In November and December 2015, Adobe stock rose to record 52-week highs. Strong revenue growth and expansion in margins are the main reasons for Adobe’s price appreciation.
Concerns over reduced customer spending brought software and cybersecurity stocks down
However, Adobe stock’s upward movement was curtailed to an extent in 2016, as the above chart shows. Tableau Software (DATA), which released its fiscal 4Q15 earnings on February 4, gave a weak earnings outlook for 2016 due to a slowdown in customer spending. This news created a ripple effect and was instrumental in the fall of software and cybersecurity stocks.
LinkedIn (LNKD) also issued weaker-than-expected guidance for 2016, which exacerbated this downfall. Among enterprise software players, Adobe and Salesforce (CRM) saw their stock fall by ~7% and 11%, respectively, in early February 2016 as a result of the Tableau and LinkedIn announcement.
Though Adobe’s stock fell 10% in 2016 to date, the company’s strong revenues, expansion in margins, and reasonable debt levels helped Adobe’s stock to continue their upward journey afterward. Goldman Sachs, which rates Adobe’s stock as neutral, has raised its target for the stock to $92 from $74.
You might consider investing in the Technology Select Sector SPDR Fund (XLK) to gain exposure to Adobe, which makes up 1.1% of QQQ. This ETF invests ~38% of its holdings in application software.