Bank of America (NYSE:BAC) made a strong claim earlier this month, stating that it believes “immersive reality” stocks could be among the winners within the next five years.
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The bank’s research team believes a generational consumer shift could alter the landscape of the technology sector, claiming that “social media was a major innovation for Gen X and Boomers, but Gen Z & Alpha are shifting media consumption patterns towards experiences that mix elements of social, immersive, and user-generated content.”
Among Bank of America’s top generational picks are Adobe (NASDAQ:ADBE), Snap (NYSE:SNAP), and Roblox (NYSE:RBLX). I’m also bullish on the three stocks; here’s why.
Adobe (ADBE)
Adobe could be one of the primary beneficiaries of cloud-based growth. The company’s integrated business model is conducive to today’s world of content sharing. Furthermore, the staggering fundamental growth of SMEs (small-to-medium-sized enterprises) in recent years has provided significant tailwinds to industries such as video editing, graphic design, and website editing. Adobe is in a prime position to capitalize on a changing online business environment with its established features.
In recent events, Adobe moved to acquire Figma in a $20 billion deal in September. According to reports, the deal completion will depend on DoJ (Department of Justice) clearance. However, probabilistically speaking, few stumbling blocks will occur, allowing Adobe to improve its web development interface with the addition of Figma’s niche technology.
A noteworthy mention of Adobe’s infrastructure is its economies of scale. The company’s 35.45% EBIT (earnings before interest and tax) margin speaks volumes, suggesting the firm has significant pricing power over its customers and bargaining power over its suppliers. Moreover, Adobe has a five-year revenue compound annual growth rate (CAGR) of 20%, indicating secular growth. Secular growth provides a hedge against uncertain economic times, suggesting Adobe could soon be a countercyclical company.
Adobe is part of a growth-stage industry. Therefore, its stock’s valuation multiples aren’t of primary concern. Nevertheless, Adobe is trading at a relative discount as its price-to-sales and price-to-earnings ratios are 40% and 44% lower than their five-year averages. This suggests that a value gap might be on offer.
Is ADBE a Good Stock to Buy, According to Analysts?
Turning to Wall Street, Adobe earns a Moderate Buy consensus rating based on 10 Buys and 14 Holds assigned in the past three months. The average ADBE stock price target of $382.90 suggests 13.1% upside potential.
Snap (SNAP)
There are no two ways about it; Snap stock has suffered a torrid time with an approximately 82% year-to-date drawdown. The good news is that Snap’s capitulation during 2022’s bear market presents investors with an opportunity to invest in an oversold asset. For example, the stock is trading 82% below its five-year average price-to-sales ratio, which certainly isn’t a deal to neglect.
Although many analysts are concerned about Snap’s stagnating market positioning, the news that China’s TikTok might be banned from the American market provides a critical tailwind to Snap on the basis that a portion of TikTok’s market share will be phased into Snap’s court.
The company released its third-quarter earnings report in October, revealing a revenue miss of $10 million, subsequently sending its investor base into a tizzy. However, clearer minds will realize that Snap’s organic growth remains robust, with a 19% in year-over-year daily active users. In addition, the firm has tapered its income statement, conveyed by its earnings-per-share beat of nine cents per share. A more efficient income statement could proliferate residual value, in turn adding appeal to Snap stock’s investment profile.
Is SNAP a Good Stock to Buy, According to Analysts?
Turning to Wall Street, Snap earns a Hold consensus rating based on five Buys, 19 Holds, and two Sells assigned in the past three months. The average SNAP stock price target of $10.20 suggests 20.4% upside potential.
Roblox (RBLX)
Roblox operates in a newly-formed industry that primarily caters to 3D developers. As a rule of thumb, embryonic-stage industries exhibit inconsistent growth and need a period of consolidation before producing congruous stock returns. This explains the volatility attached to Roblox’s stock.
According to Bank of America, companies like Roblox are ideally placed to benefit from a generational consumer shift. In a published note, the bank stated: “Younger consumers spend significant time in virtual spaces just hanging out, and they are more likely to be influenced by peers and experiences.”
The investment bank’s claim is well thought out. More than 67% of Roblox’s users are aged 16 and under, many of whom will settle into the labor force in the coming years, providing Roblox with spending power tailwinds. Moreover, Roblox has tapped into the mobile device sphere, as approximately 72% of its users participate via mobile.
Furthermore, Roblox’s short-term commercial growth pattern suggests it could garner a dominant position in the market before consolidation occurs. According to the firm’s third-quarter financial results, its daily active users and users’ active hours surged by 24% and 20%, respectively, in the past year. On top of that, Roblox’s bookings exceeded $700 million in its third quarter, adding validity to claims of prospective market dominance.
Valuation remains a concern for Roblox as its stock is trading at 7.4 times its sales and 45 times its operating cash flow. However, the firm’s 33.39% year-over-year revenue growth rate might justify its elevated price multiples.
Is RBLX a Good Stock to Buy, According to Analysts?
Turning to Wall Street, Roblox earns a Hold consensus rating based on seven Buys, six Holds, and three Sells assigned in the past three months. The average RBLX stock price target of $37.34 suggests 25.2% upside potential.
Concluding Thoughts
The technology sector’s landscape is changing, with a generational shift being the catalyst. Adobe could benefit from its established market position and robust balance sheet, whereas firms like Snap and Roblox might receive support from embryonic-stage industry consolidation.
