tiprankstipranks
Adobe: High Growth and Profitability; Slightly High Valuation
Stock Analysis & Ideas

Adobe: High Growth and Profitability; Slightly High Valuation

Adobe (ADBE) is an American software company originally incorporated in 1983 in California. It was then reincorporated in Delaware in 1997 and is currently headquartered in San Jose, California.

Adobe is one of the largest software companies globally and is known for its multimedia and creative software products. In addition to its Digital Media segment, it also operates through its Digital Experience and Publishing segments. The company has more than 25,000 employees worldwide and was initially publicly offered in August 1986.

I am neutral on Adobe as its price target implies strong total return potential, and Wall Street analysts are generally quite bullish on it, but its valuation multiples appear slightly stretched relative to the company’s history.

Strengths

Adobe is renowned for its digital solutions. Its programs aren’t just used by one particular population; students, professionals, artists, and even government agencies rely on Adobe’s solutions. In addition to Adobe’s Creative Cloud, the company is also known for its Document Cloud and Experience Cloud.

Programs like Adobe Photoshop and Adobe Acrobat have been downloaded millions of times and are used by industry professionals and novices alike. It should also be noted that Adobe has made several significant acquisitions, including ContentCal and Frame.io, in 2021 alone.

Recent Results

Adobe’s fourth quarter in 2021 ended on December 3, 2021, and its results have been consistent with its reputation. The company’s Q4 revenue was $4.11 billion, representing 20% growth from the previous year. The revenue from the Digital Media segment was $3.01 billion, which was a 21% increase from the previous year.

The company also saw 19% year-over-year growth in Creative revenue, totaling $2.48 million in Q4. Additionally, the Document Cloud segment earned $532 million, constituting a 29% growth from the previous year, and the Digital Experience segment totaled revenue of $1.01 billion, a 23% year-over-year increase.

Valuation Metrics

ADBE stock looks slightly overvalued here as it trades at a small premium to historical averages on both an EV/EBITDA ratio and a forward price/normalized earnings basis. Its EV/EBITDA ratio is 36.8x compared to its historical average of 42.1x, and its forward price/normalized earnings ratio is 37x compared to its historical average of 36.7x.

Wall Street’s Take

According to Wall Street analysts, ADBE earns a Moderate Buy consensus rating based on 17 Buys and six Hold ratings assigned in the past three months. Additionally, the average Adobe price target of $667.4 puts the upside potential at 31.4%.

Summary and Conclusions

Adobe is a leading player in its field and continues to strengthen its strong market position with investments in innovation. It also is enjoying strong growth momentum and expects it to continue for the foreseeable future while the business is also highly profitable with EBITDA margins of around 50%.

On top of that, Wall Street analysts are overwhelmingly bullish on the stock here, and the average price target implies substantial upside over the next year. On the other hand, the valuation multiples are slightly above historical averages. As a result, investors might want to wait for a pullback in the stock price before adding shares.

Download the TipRanks mobile app now

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles