Best Tech Stock to Buy in A Recession

Tech stocks have been under pressure since last year due to the Federal Reserve’s aggressive interest rate hikes. After announcing its tenth interest rate hike of 25 basis points last week, the central bank has signaled that there could be a pause in the tightening cycle. While this could be good news for tech stocks, one must be careful with the spate of macroeconomic data due for release.

With a recession likely this year, not all tech stocks are good investment options. However, investors could look to buy software giant Adobe Inc. (ADBE) during a recession.

In this piece, I have discussed several reasons why it could be wise to buy the stock.

The Software-as-a-Service (SaaS) giant enjoys customer stickiness due to its vast array of products and services. ADBE is able to maintain its margins irrespective of an economic cycle due to its solid user base. Moreover, its subscriber base remains intact due to the high switching costs.

During the first quarter, ADBE’s EPS and revenue came above analyst estimates. Its EPS was 3.3% higher than the consensus estimate, while its revenue beat the analyst estimates by 0.7%.

ADBE’s Executive VP and CFO, Dan Durn, stated, “Our strong engine of innovation combined with world-class operational rigor drove profitable growth in Q1, setting us up to deliver another strong fiscal year. Adobe is better positioned today than we’ve ever been to serve our customers globally.”

The company reported record revenue during the first quarter. Revenue grew 13% year-over-year in constant currency. ADBE’s Chairman and CEO Shantanu Narayen said, “Adobe drove record Q1 revenue, and we are raising our annual targets based on the tremendous market opportunity and continued confidence in our execution.”

ADBE updated its targets for fiscal 2023, with its digital media net new ARR is expected to be approximately $1.70 billion, while its non-GAAP EPS is expected to come between $15.30 and $15.60.

For the second quarter, the company expects its total revenue to come between $4.75 billion and $4.78 billion. Its Digital Media net new ARR is expected to be approximately $420 million, while its Digital Media segment revenue is expected to come between $3.45 billion and $3.47 billion. Its non-GAAP EPS is expected to come between $3.75 and $3.80.

ADBE’s stock has gained 13.9% in price over the past six months and 2.2% year-to-date to close the last trading session at $344.06.

Here’s what could influence ADBE’s performance in the upcoming months:

Positive Latest Developments

On March 23, 2023, BlackBerry Limited (BB) and ADBE announced that they have partnered to deliver a secure forms solution for mobile.

ADBE’s Vice President and Chief Technology Officer for Public Sector, John Landwehr, claimed, “The partnership between BlackBerry and Adobe enhances operational processing and workforce efficiency for hiring and onboarding, procurement of goods and services, medical readiness, maintenance, and logistics, and so many more use cases, that require signed approvals at any time, on any device.”

On February 23, 2023, ADBE announced a collaboration with Qualcomm Incorporated (QCOM) to help fuel its digital strategy and that of its affiliated companies.

ADBE’s president of digital experience business, Anil Chakravarthy, said, “By adopting Adobe’s enterprise applications, Qualcomm has an end-to-end solution that will enhance omnichannel experiences for business customers and improve marketing performance.”

“The partnership will help Qualcomm take its own digital transformation to the next level and deliver new ways to showcase the transformative technologies it is delivering to the world,” he added.

Robust Financials

For the fiscal first quarter that ended March 31, 2023, ADBE’s total revenue increased 9.2% year-over-year to $4.66 billion. The company’s gross profit increased 9% from the year-ago value to $4.09 billion. Its non-GAAP operating income increased 6.9% year-over-year to $2.13 billion.

Its non-GAAP net income increased 9% year-over-year to $1.75 billion. In addition, its non-GAAP EPS came in at $3.80, representing an increase of 12.8% year-over-year.

High Profitability

In terms of the trailing-12-month EBIT margin, ADBE’s 33.91% is 627.7% higher than the 4.66% industry average. Its 26.32% trailing-12-month net income margin is 909.3% higher than the 2.61% industry average. Likewise, its 33.86% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.11%.

Positive Analyst Estimates

Analysts expect ADBE’s EPS for fiscal 2023 and 2024 to increase 12.3% and 13.3% year-over-year to $15.40 and $17.44. Its revenue for fiscal 2023 and 2024 is expected to increase 9.6% and 11.9% year-over-year to $19.30 billion and $21.59 billion.

ADBE’s EPS and revenue for the quarter ending May 31, 2023, are expected to increase 13% and 8.8% year-over-year to $3.79 and $4.77 billion, respectively. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

Solid Historical Growth

ADBE’s EBIT grew at a CAGR of 20.3% over the past three years. Its EPS grew at a CAGR of 15.4% over the past three years. In addition, its net income grew at a CAGR of 13.6% in the same time frame.

POWR Ratings Show Promise

ADBE has an overall B rating, equating to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade for Quality, consistent with its high profitability. It also has a B for Sentiment, in sync with its favorable analyst estimates.

Within the Software - Application industry, ADBE is ranked #17 out of 135 stocks. Click here to access ADBE ratings for Growth, Value, Momentum, and Stability.

Bottom Line

ADBE reported record revenue in the first quarter. Despite the uncertain macroeconomic environment, the company has raised its Digital Media net new ARR and EPS targets for fiscal 2023. Unlike its other tech counterparts, ADBE enjoys recurring revenues which helps it not only maintain its margins but also grow them over time, helping it remain insulated during a recession.

Given its robust financials, favorable analyst estimates, solid historical growth, and high profitability, it could be wise to buy the stock now.

How Does Adobe Inc. (ADBE) Stack up Against Its Peers?

ADBE has an overall POWR Rating of B. Check out these other stocks within the Software - Application industry with A (Strong Buy) or B (Buy) ratings: eGain Corporation (EGAN), Commvault Systems, Inc. (CVLT), and Karooooo Ltd. (KARO).

What To Do Next?

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ADBE shares were trading at $343.97 per share on Tuesday afternoon, down $0.09 (-0.03%). Year-to-date, ADBE has gained 2.21%, versus a 7.87% rise in the benchmark S&P 500 index during the same period.

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.

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