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Adobe (ADBE): Buy or Die?

Daniel Laboe

Subscription-based revenue is the new gold standard for software companies. This business model creates long-standing sustainable revenue that has the ability to continue to grow as the business does. This model has been successfully integrated into software behemoth, Adobe ADBE. Adobe has driven north of 20% revenue growth for every quarter year-over-year since 2015. ADBE has surge more than 313% in 5 years, and potential investors keep missing the boat. The stock is on track for their 8th consecutive year of double-digit returns.

Adobe Stock Analysis

ADBE is riding its all-time high, trading around $300. I as an investor am always apprehensive about buying such a volatile stock on new highs because historical price trends show that the stock is likely to dip before it hits new highs. This being said, I do not have a crystal ball and this price could very well be the 52-week low in 52 weeks.

This firm’s performance has been extraordinary since its pivot to cloud-based software, which began in mid-2013. They were an early mover on this type of subscription driven software and have been able to reap the benefits. Effectively all of Adobe’s revenue is now being delivered to customers through the cloud and their stable subscription-based sales are pushing year-over-year as well as quarter-over-quarter growth nowhere but up.

Adobe is a must have software for professionals in both creative fields and marketing. They are the clear leader in digital content creation which is a category that is only going to grow as our society becomes increasingly digitalized. Being an essential provider of software for professionals in a growing industry gives this firm a solid backing for a buy recommendation at the right valuation.

Looking at valuation, this firm is consistent with a firm that is expected to have strong double-digit top and bottom-line growth for the next 3 years. ADBE is trading at a TTM P/E of 51x and a forward P/E of 40x, both around their 5-year median.

Risks

Adobe has an enormous amount of growth priced into it, and if they are unable to grow their customer base or software prices in line with analyst expectations, the stock’s current valuation could be discounted. The current valuations are far above any comparable firm and economic as well as geopolitical headwinds could have a significant downside to Adobe’s stock price.

Competing cloud-based software firms include Oracle ORCL, Microsoft MSFT, and Salesforce CRM.

Take Away  

There is no question that Adobe has an extraordinary business model with an enormous amount of potential as the undeniable leader in the digital content creation space. The question is whether the current price is the right price to buy. As a long term investor (more than 2 years) not worried about short to medium term volatility, I would say this stock is trading at reasonable enough valuations to buy and hold through the volatility. 8 consecutive years of strong double digit stock return is a convincing argument for a proved business model.

If you are a medium to short term investor, (6 months or less) I would wait for a valuation dip to jump into ABDE. Seeing the 12-month forward P/E come closer to the 35x level would make me as an investor feel much more comfortable about buying this software powerhouse.

 

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