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The best tech stock to buy in an inflationary environment

by Investoradar

After last year’s quantitative easing with all the money being printed, the inflation rate is heading higher and the Fed is now starting to raise rates. During an inflationary environment, two of the most important criteria for a stock to do well are its pricing power and customer stickiness. A prime example of a non-tech stock is Costco (COST) where customers are very loyal to the brand and will continue to shop there even during economic downturns.

Out of all the tech stocks, one of my favourite picks is Adobe (ADBE). Adobe is a company specialises in software for the creation and publication of a wide range of content, including graphics, photography, illustration, animation, multimedia/video, motion pictures, and print. Their flagship products include photoshop and premiere pro which are industry standards for creatives. Adobe is the leader in the industry with basically little to no competitor, the only viable competitor in the editing space is Avid (AVID), which is a much smaller company with a market cap of only $1.6 billion. This gives Adobe strong pricing power and customer stickiness as it is the only good option customers have. The industry is also having a massive tailwind as the number of creators and influencers is rising quickly and most of them use Adobe to edit their videos and photos.

Besides, it also offers marketing and analytic solutions like Adobe Experience Cloud which transforms data into customer profiles to help create a personalised experience and gain more insight into customer behaviours. Adobe is also expanding its footprint into the e-signature space to rival competitors such as DocuSign (DOCU). The e-signature market is a fast-growing industry as most documents are now being viewed and sent online. It is forecasted to grow at a compound annual growth rate of 27% to $6.9 billion in 2025.

Over 90% of Adobe’s revenue is subscription revenue which allows the company to have a stable revenue stream. The company’s margin is insanely high with a 90% gross margin and 40% net margin which allows the company to generate an enormous amount of cash flow every quarter. The company’s management team is also very competent and reactive. They recently introduced a product that allows people to create their own NFT easily. This allows Adobe to capitalise from the latest Metaverse trend and to attract new customers. The company is trading at a relatively lofty valuation, however, the stock has always been trading at an elevated valuation due to its top-notch quality. I believe the stock price is justified as the company’s prospects remain very strong and will outperform even during an inflationary environment. 

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