The U.S. stock market doubled between 2019 and 2021, putting high expectations on 2022 to be another above-average year. Yet there’s concern that equity valuations have ballooned to unreasonably expensive levels.
Long-term investors know that timing the market doesn’t work. Rather, persevering even in the face of a potential market sell-off is the best option. As an example, if you had invested in the S&P 500 in October 2007 at its highest point right before the financial crisis, you still would have tripled your money between then and now.
1. Adobe: An anchor in infrastructure software
When you think of big tech, you may think of companies like Apple, Microsoft, Alphabet, and Meta Platforms. Maybe even Nvidia or Tesla. Those businesses are certainty on a different level than others. However, right below that tier are sub $300 billion market cap businesses like Salesforce, Oracle, Intel, Intuit, and Shopify — all well-known companies. It may surprise you to learn that Adobe is more valuable than any company on that “Tier 2” list, even though Adobe’s stock price is down 25% from its all-time high.
Adobe is the undisputed industry leader in digital media software for individuals, students, and businesses of all sizes. Adobe is also one of the pioneers of software as a service (SaaS). In 2013, Adobe converted its business from selling software that folks could download to a recurring revenue stream through Adobe Creative Cloud — a subscription that grants access to the Adobe suite of products for a monthly or annual fee.
Since then, Adobe has become one of the most stable software companies in the world. Its revenue growth may have slowed down, but its profit and free cash flow (FCF) are impeccable.
The above chart says it all. Over the past five years, Adobe has grown revenue by 116%, but its net income and FCF have both grown by over 150%. Although Adobe stock has increased nearly fourfold in the last five years, its price-to-earnings ratio and price-to-FCF ratio are right around the five-year median.
In short, Adobe is an incredibly entrenched business that generates subscription revenue, has moderate growth, and is converting more sales into actual profit.
2. Paypal: The future of finance
PayPal and Adobe may be in completely different industries. But they are surprisingly similar stocks.
Like Adobe, PayPal has come under fire for a slowing growth rate, but its profit and FCF have greatly improved compared to years past.
Also similar to Adobe, PayPal has crushed the market over the last five years, but PayPal stock is still priced around its five-year average valuation.
PayPal is a great choice for investors interested in the…
Continue reading at THE MOTLEY FOOL