Since Dec. 9, 2015, share of digital cloud giant Adobe Systems (ADBE) - Get Report has fallen as much as 22% from around $91 per share to a low of $71.27 on Feb. 8, 2016. And while the shares -- currently at around $86 -- have recovered some of those losses, they are still down more than 6% since Dec. 9.
The December date is not random. It was the day I advised investors to take profits, arguing that San Jose, Calif.-based software company -- then up 22% at that point in 2015 -- had already been rewarded for its strong performance. then at 91 times trailing earnings, compared to a P/E of 21 for the S&P 500 index, there was nothing cheap about Adobe shares. The story has now changed.
Fast-forward three months. Adobe's trailing P/E has fallen to 69, albeit still expensive, but digestible, given is earnings growth is now positive.
The company will report first quarter fiscal 2016 earnings results after the closing bell Thursday. Known for its popular Acrobat (PDF) document reader and Photoshop graphic software, the risk-versus-reward has turned positive. Investors would do well to add these shares now and hold for the long term.
For the quarter that ended in February, the company is expected to earn 61 cents per share on revenue of $1.34 billion, translating to year-over-year growth of 40% and 20.5%, respectively. For the full-year, ending in November, earnings are projected to climb 32% year-over-year to $2.76 per share, while revenue of $5.74 billion would mark a year-over-year increase of 20%.
Adobe stock -- down about 8% year to date -- has underperformed not only the S&P 500 (SPX) index (down 1.44%), but also the iShares North American Tech-Software ETF (IGV) - Get Report (down 6.44%). But the stock has a consensus buy rating and an average analyst 12-month price target of $105, suggesting 22% gains from current levels of around $86. And the implied gain jumps to 34% is the stock reaches its high target of $115.
Why the confidence? Adobe, which has beaten Wall Street's earnings estimates in eight straight quarters, has executed its business conversion. It has moved from a company that sells software from a CD inside a box to a full-fledged digital cloud juggernaut with a strong subscription platform, where its subscriptions make up some 70% of total revenue.
And thanks to the strong adoption rate of its creative cloud business, which has posted deferred revenue balance of 29%, the company is now projected to grow earnings by an average annual rate of 25% in the next five years. This means Adobe -- after its stock correction -- can now make patient investors tons of money in 2016 and beyond.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.