We recently compiled a list of the 8 Best Wide Moat Stocks to Buy According to Analysts. In this article, we are going to take a look at where Adobe Inc. (NASDAQ:ADBE) stands against the other wide moat stocks.
Undoubtedly, global and domestic investors have mastered the art of riding out the highs and lows of the US stock market. They tend to believe that fluctuations in the stock market are short-term, and should be dealt with accordingly.
McKinsey & Company highlighted that, in 2001, the market cap of the companies making up the S&P 500 stood at ~$10 trillion. As of mid-June 2022 (despite the bearish opening), S&P 500 market capitalization touched ~$32 trillion. Also, the mean total yearly returns (including dividends) of the S&P 500 between 1996 to mid-June 2022 was ~9% in nominal terms, or ~6.8% in real terms.
The investors have seen significant fluctuations. S&P 500 saw a strong decline in 2000, 2001, and 2002, with a ~37% decline in 2008 and a ~22% fall in 1H 2022. That being said, between 1996 and mid-June 2022, S&P 500 returns only declined 5 times annually. While there can be significant fluctuations in the US markets, the macroeconomic indicators can help provide a broader overview of the expected performance of equities.
US Fed Rate Cut – It Finally Happened
The decision on the rate cut by the US Federal Reserve was indeed a closely watched one. The apex bank decided to go for a larger 50-bps reduction in interest rates, instead of a more traditional 25-bps rate cut. This decision was more consequential than normal for 2 reasons. Firstly, this rate cut marked the initiation of a long-awaited easing cycle. Therefore, the US Federal Reserve shifted its focus away from the risks related to inflation and towards protecting the labor market and economic expansion.
Secondly, the rate cut decision itself was much more critical and engaging than normal. History suggests that the US Fed provides greater transparency when it comes to decision-making. This means the financial markets are not surprised by the decision as people know what the US Fed is going to do. However, the recent one was not like this, with markets pricing the 25-bps rate cut decision. The move to cut the key rates by 50 basis points should help the US Fed normalize rates more quickly and be ahead of the emergent slowness in the broader labor market. That being said, the US Fed’s forecasts (the dots) don’t reflect this pace continuing beyond September.
The recent report by Russell Investments highlighted that the company expects the US Fed to cut rates by 25 basis points at each of the remaining meetings in 2024. Furthermore, this pace should be sustained into 2025. If the trajectory continues, the US Fed will be down to the company’s expectations of the normal or equilibrium rate of interest of between 3%-3.25% by this time of the next year.
Equity Market Outlook Post Rate Cut
The implications for the rate cut onto equities hang mainly on the fundamental backdrop—i.e., corporate earnings and whether the US economy is heading for a soft or hard landing. In case of a soft landing, Russell Investments believes that the combination of lower rates and resilient fundamentals should benefit select areas of the market such as real estate and small caps. Regarding small caps, in particular, the investment firm expects a ripe environment for skilled active managers to pick quality businesses at more attractive valuations.
In the remainder of 2024 and 2025, the US Fed cuts are expected to have a positive effect on the economy and markets. Analysts at Wells Fargo believe that the global economy should also benefit, as major central banks around the world have already announced the cut rates or will be announcing soon.
Market experts believe that the Fed rate cut expectations have led to the investors rejigging their portfolios and pivoting towards public companies that are interest-rate sensitive. These include dividend companies, telecommunication giants, utilities, and REITs, among others.
Wall Street also believes that the rate cuts should help well-established and financially stable companies to increase their spending and investments, which are likely to reflect in their stock prices in the remainder of 2024 and early 2025.
Our methodology
To list the 8 Best Wide Moat Stocks to Buy According to Analysts, we conducted an extensive online search and sifted through online rankings and VanEck Morningstar Wide Moat ETF. Next, we considered average analysts’ price targets of the selected stocks. Finally, we ranked the stocks according to their potential upside, as of September 21. We also included the hedge fund sentiment around these stocks, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A team of engineers and scientists collaborating at a workstation surrounded by their applications and solutions.
Adobe Inc. (NASDAQ:ADBE)
Number of Hedge Fund Holders: 107
Analysts’ Average Price Target: 22.06%
Adobe Inc. (NASDAQ:ADBE) is engaged in developing, marketing, and supporting computer software products and technologies. Its products enable users to express and use information throughout all print and electronic media.
Adobe Inc. (NASDAQ:ADBE) continues to enjoy wide economic moat, primarily because of its high switching costs. This allows the company to generate returns exceeding its cost of capital. The company’s dominance in content creation software with well-established Photoshop and Illustrator solutions continues to strengthen its economic moat. It was able to add new products and features to the suite with the help of organic development and bolt-on acquisitions to drive its comprehensive portfolio of tools utilized in print, digital, and video content creation. Therefore, Wall Street remains optimistic about the company’s unique value proposition and growth potential.
Adobe Inc. (NASDAQ:ADBE)’s AI-driven products, including Firefly AI models, exceeded 12 billion generations, demonstrating strong adoption. Moving forward, the company’s revenue growth should come from its competitive advantage, which is being strengthened by its key customer wins with well-renowned companies like Amazon, Disney, and the US Treasury. As a result, despite the competition, Adobe Inc. (NASDAQ:ADBE) expects continued growth and record net new ARR in FY 2024.
The company has maintained its strong emphasis on AI and subscription services, which should help in expanding its market presence. For 4Q 2024, Adobe Inc. (NASDAQ:ADBE) expects total revenue in the range of $5.50 billion – $5.55 billion and earnings per share (GAAP) of between $3.58 to $3.63.
Analysts at Wells Fargo & Company initiated coverage on the shares of Adobe Inc. (NASDAQ:ADBE), increasing its price objective from $675.00 to $700.00, giving it an “Overweight” rating on 14th June. Notably, 107 hedge funds reported owning stakes in the company at the end of 2Q 2024, as per Insider Monkey.
Polen Capital, an investment management company, released its second-quarter 2024 investor letter and mentioned Adobe Inc. (NASDAQ:ADBE). Here is what the fund said:
“With Adobe Inc. (NASDAQ:ADBE), in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
Overall ADBE ranks 2nd on our list of the best wide moat stocks to buy according to analysts. While we acknowledge the potential of ADBE as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’
Disclosure: None. This article is originally published at Insider Monkey.