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Adobe (ADBE -1.53%) and Lululemon Athletica (LULU -1.21%) are leaders in the growing industries of software and athletic apparel, so it shouldn’t come as a surprise when these stocks outperform the broader market. Over the last 10 years, a $1,000 investment in Adobe would have grown to be worth roughly $9,034 today, while the same investment in Lululemon would be worth about $4,121. Both stocks soundly beat the investment return of putting your money in an index fund that tracks the performance of the S&P 500.
ADBE data by YCharts
After a sharp sell-off throughout the first half of the year, Adobe stock is currently up 24.3% in the fourth quarter, while Lululemon is up 13.7%. Both companies recently reported better-than-expected financial results for the last quarter, showing why these two no-brainer stocks are still good places to park some money for the long haul.
It’s estimated that 85% of small businesses are investing in tools to become more productive, and this trend continues to play into the hands of one of the leading software companies in the world. Adobe reported better-than-expected revenue and earnings for the most recent quarter, with currency-adjusted revenue up 14% year over year. The stock is up 21% since the beginning of the fourth quarter, outperforming the 6.9% gain for the S&P 500 index.
Adobe expects another year of strong growth in fiscal 2023, with revenue expected to increase approximately 13% year over year excluding currency, with adjusted EPS reaching around $15.30. This guidance doesn’t include the potential impact from the pending acquisition of Figma for $20 billion in cash and stock. That would put the stock’s forward price-to-earnings ratio (P/E) at just 21.5, or roughly in line with the broader market average.
The addition of Figma will bolster Adobe’s suite of design tools by bringing a robust collaboration platform to allow teams to work better together. Figma should extend Adobe’s reach with new customers and expand its long-term addressable market which was already estimated at over $200 billion.
Like most software companies, Adobe is a highly profitable business, generating $7.4 billion of free cash flow on $17.6 billion of revenue. Considering the company’s consistent growth, profitability, and leading subscription offerings in a growing industry, the market sell-off is a good opportunity to add shares of this long-term compounding machine.
Lululemon stock significantly outperformed the broader market this quarter, although it gave back some gains following its latest earnings report. The company reported another solid quarter of growth, with revenue up 28% year over year in the fiscal third quarter.
However, the company offered revenue and earnings guidance that was slightly below Wall Street’s estimates. For example, management sees fourth-quarter revenue coming in between $2.605 billion to $2.655 billion, while analysts were expecting consensus guidance of $2.65 billion. However, that’s hardly a reason to sell shares of a brand with so much growth opportunity still ahead. Overall, the company’s robust top-line growth last quarter is impressive in such a challenging retail environment.
The stock initially sold off on the earnings news, but that could have been mostly market traders taking profits after a strong upward advance since the beginning of the quarter. After trading up over 30% quarter to date, the stock is still up 11%, beating the market’s return of 6.8%.
Lululemon continues to march ahead with the goal of doubling 2021 revenue to $12.5 billion by 2026. Management attributed its recent growth to new products, deep relationships with customers, and solid execution from the company’s teams around the world. These are the pillars that have guided Lululemon from a $2 billion revenue business 10 years ago to over $7 billion this year, and it’s just scratching the surface of its global growth potential.
Lululemon is on pace to close the current fiscal year with nearly $8 billion in annual revenue, representing a three-year compound annual growth rate of 26%. The athletic-apparel industry has been one of the most consistent growing markets in retail, and Lululemon should continue to ride those coattails to market-beating returns for investors.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Lululemon Athletica. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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