Adobe has an attractive risk-reward profile; despite leadership transition risks and margin pressure from lower-cost competition, accelerating revenue growth and strong share buybacks make it a good long-term hold.

Those four stocks are Adobe, MGM Resorts, Dick Sporting Goods, and Lyft.

One of them is Adobe. is there a growth problem with Adobe? Well, it doesn't really appear to be the case right now. Total revenue continues to grow at about a 10, 11, 12% growth rate.

So that's actually accelerating over the past couple of quarters. That's really good to see.

let's dig into Adobe and let's start with the company statistics because I think this is where you start to see the value and this was actually a little bit better value about 2 months ago in June. Shares are up about 50% since then.

So there's a lot of opportunity to recover for Adobe. a lot of questions yet to answer as they look for a new CEO and a lot of people new people in their leadership ranks but the valuation is pretty compelling because of all that uncertainty.

So price to earnings multiple on a trailing basis is about 17 on a forward basis so only about 11 price of free cash flow on a forward basis also about 11. So just that alone they could buy back nearly 10% of their shares outstanding with the cash that they're generating each quarter.

Their balance sheet also pretty solid. got a little bit of net debt on the balance sheet, but the enterprise value is about $118 billion today. Do we see any sort of signs that Adobe's business is slowing down?

Right now, we don't. And that's what I think investors really need to keep an eye on. This one really popped out to me. In the most recent quarter, growth is actually accelerating.

So, this is not necessarily what you would expect from a company that is potentially going to be disrupted by artificial intelligence or lowerc cost products like Canva.

Instead, you're starting to see Adobe start to pick up its revenue growth. Now, to drive some of that revenue growth, one of the challenges is are they going to have to give up margin to do that.

They've said that they're going to go into some of these lowerc cost products, expand their premium products a little bit more. So that is a potential risk. You start to see these gross margins start to come down just a little bit.

Operating margin is doing the same down to about 33.8% in the most recent quarter. So that is something that you want to keep an eye on.

But if you're able to keep that revenue growth at a pretty steady double-digit pace and maintain reasonably good margins, this can be a really good company to own long term.

This is the free cash flow they've generated on an annualized basis going all the way back to 2017. So you can see that free cash flow has increased now a little bit over million dollars on an annualized basis.

Well, one of the things that they're doing more and more is buying back stock 9.5 billion in fiscal 2024. Fiscal 2025 that bumps up to 11.3 billion. Now 9 billion over the past 12 months.

So they are starting to buy back more and more of their stock. And this is as the valuation of the stock starts to come down.

So this is a really nice position to be if the business does turn around, if this growth rate continues to be in that 10 to 15% range and if margins don't get destroyed in the process because what you're doing by buying back shares is improving the leverage in the in the business, the financial leverage that you have as an investor.

One of the big questions that Adobe has for them is what is their leadership going to look like in the future. Their longtime CEO announced earlier this year that he is going to be stepping down.

They're looking for a replacement, but there's a whole suite of people that are likely to turn over in that sea suite, and there's a lot of questions about what they're going to do for the strategy in the future.

Are they going to continue the existing strategy where you're trying to sell seats on an ongoing basis? Is there going to be more of a pay as you play kind of a model? That makes more sense with artificial intelligence.

Hey, I need to have this image. I will pay a specific amount for this image. That could be part of the business model going forward. Do you kind of fuse those two things together?

One of the things that Adobe did extremely well was moving to the SAS model about a decade ago, but even that was relatively painful. If you look back, this goes all the way back to 2005.

You can see that Adobe's revenue negative during the financial crisis, so 2009. But here's really where they made the transition to the SAS model. Negative revenue comps, negative revenue comps in 2013.

And then that starts to increase to double digits by the time you get to 2015.

If we look at margins, you see similar challenges. For a few years there, they had really, really terrible operating margins as they're trying to move to this SAS model. But you can see that margins continually increased between about 2014 and through today.

So is this can be another difficult transition because that's what we saw with Adobe a little over a decade ago. Could be the same thing. The nice thing for investors is you're getting a pretty decent price for the stock.

You're getting management buying back shares with the cash that they have coming through the business. And this is a much bigger, more powerful company than it was a decade ago.

So I think the riskreward here is much more attractive than it was at that point for Adobe.