Adobe ADBE is one of the first big names set to report its third quarter financial metrics, with its release due out on Tuesday, September 15. The cloud software giant has outperformed the tech sector and crushed the Nasdaq in 2020. The question is should investors consider buying ADBE stock despite the recent tech pullback for its longer-term growth potential?

Creative Advantage…

The cloud space continues to expand, yet many software firms sell relatively similar offerings. This overlap and competition will one day lead to consolidation within the broader SaaS domain and beyond, while Amazon AMZN, Microsoft MSFT, and other giants seem poised to benefit continuously. That said, there are those select companies that provide relatively unique software offerings.

Adobe’s suite of subscription-based creative and design software from Photoshop to Illustrator are often regarded as nearly irreplaceable by many individuals, businesses, and schools. ADBE’s Creative Cloud offerings can be viewed in a similar light to Microsoft’s Office suite. And this helps provide a strong moat.

ADBE has also expanded its business-focused platforms and solutions for marketing and commerce in recent years, while its PDF and e-signature units remain important. The company topped our Q2 estimates, with sales up 14% during the period ended in late May. “The tectonic shift towards ‘all things digital’ across all customer segments globally will serve as a tailwind to our growth initiatives as we emerge from this crisis,” CEO Shantanu Narayen said in prepared remarks.

Other Fundamentals…

ADBE’s full-year sales climbed by roughly 25% in each of the last three years, with 22% expansion in FY16 and 16% growth in FY15. This is an impressive run for a company of its age and size and helps highlight the stability of its business model.

Last quarter, Adobe bought back roughly 2.6 million shares to showcase its strength at a time when the likes of AT&T T and others put a halt to their programs. And as we touched on at the top, the stock has crushed its industry in 2020, up 44% vs. 23%.

This is part of a far more impressive five-year run that’s seen ADBE soar 500% to match Amazon and easily outpace the rest of the FAANG stocks—including Apple’s AAPL 300% and Netflix’s NFLX 400%. As a high-flyer, Adobe fell victim to the recent selloff that saw the Nasdaq fall into correction territory in only three sessions.

Adobe closed regular trading Thursday at $476.26 per share, 10% below its recent highs, after bouncing off its 50-day moving average on Wednesday. It’s worth noting that Adobe’s valuation likely falls into the stretched category. But investors have proven they are willing to pay a big premium for ADBE over the years and the pandemic has boosted big-tech’s appeal.

Outlook

Our Zacks Estimates call for Adobe’s adjusted Q3 earnings to climb 17% to $2.40 per share, with its sales projected to jump over 11% to $3.15 billion. This would come in slightly below Q2’s top-line expansion, but does help it stand out.

For instance, total S&P 500 earnings are expected to decline -23.9% on -3.3% lower revenues in the third quarter, with technology sector earnings projected to sink 5% (also read: Looking Ahead to the Q3 Earnings Season).

Peeking even further ahead, ADBE’s FY20 revenue is projected to jump 14%, with FY21 expected to come in another 15% higher to stretch its streak of double-digit sales growth to seven years. Plus, the creative software firm’s adjusted earnings are projected to jump 24% and 13%, respectively over this same stretch

Bottom Line

Adobe is a Zacks Rank #3 (Hold) heading into its upcoming earnings release. The firm also rocks “B” grades for Growth and Momentum in our Style Scores system and it has a history of earnings beats. That said, the market pullback could continue, as many of the big names like Tesla TSLA and Zoom Video ZM still have valuations that seem unthinkable to many.

The added uncertainty of the upcoming election might also make it prudent to hold off on Adobe until at least after it reports to see how the market reacts and what its guidance looks like.

Yet, institutional investors have to find returns somewhere and interest rates are pinned near zero for the foreseeable future. So stocks with longer-term growth outlooks and wide moats appear like longer-term buy and hold candidates.

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>

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