Adobe Inc. (NASDAQ:ADBE) Stocks Pounded By 30% But Not Lagging Market On Growth Or Pricing
Adobe Inc. (NASDAQ:ADBE) shares have had a horrible month, losing 30% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 54% share price decline.
Although its price has dipped substantially, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may still consider Adobe as a stock to avoid entirely with its 29.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Adobe could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Adobe
Keen to find out how analysts think Adobe's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Adobe's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. Still, the latest three year period has seen an excellent 81% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 18% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 9.7% each year, which is noticeably less attractive.
With this information, we can see why Adobe is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Adobe's shares may have retreated, but its P/E is still flying high. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Adobe maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Adobe with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Adobe. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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