Adobe (NASDAQ:ADBE) has maintained a 30+ year track record of innovation in creative digital solutions. Today, the company’s tools and platforms continue to improve, integrating cloud, content sharing, and collaboration solutions. The company’s unique solutions range has reaffirmed its leadership position in the market. Remote work and the growth of online businesses after the pandemic have only reinforced the company’s dominant position. In 2022, Adobe has seen a sharp stock price decline despite strong financial performance. As valuation multiples have contracted significantly, ADBE offers a relatively attractive proposition to potential investors.
Stock Performance: A Sharp Fall after Years of Outperformance
Adobe had been one of the best-performing large-cap technology stocks over the last decade – up until 2022. As technology stock prices imploded after the start of 2022, Adobe has marked losses of over 40%, and it’s down 51% from its high. Still, over the trailing five and 10-year periods, ADBE holds total returns of 91% and 809%, respectively.
Unlike many growth stocks that rallied significantly in 2021, ADBE displays a sound financial basis characterized by sustainable growth, strong margins, and ample cash flow production. Nevertheless, the stock is suffering as the Nasdaq 100 index (NDX) remains nearly 30% lower compared to the start of the year.
An Uninterrupted Growth Story
Adobe has consistently delivered strong growth numbers over the last decade. Revenue has grown at a 10-year 14.6% CAGR and a five-year CAGR of 20%, indicating an acceleration of growth, especially after the pandemic. Operating income and EPS have grown even more aggressively at 10 and five-year CAGRs of 18%-21% and 25%-27%, respectively.
For the fiscal year ending in November 2022, analysts expect a 9.2% year-over-year earnings-per-share (EPS) increase and an 11.6% year-over-year revenue increase. While a slowdown in growth can be observed, given the challenges of the current macroeconomic environment, expectations are set over the next couple of years for double-digit top and bottom-line growth to continue.
Strong Profitability and Cash-Flow Production
While sales and earnings growth has been consistently good, Adobe’s profitability capacity is almost unmatched in large-cap technology stocks. The company records an 87% gross margin, a 40% EBITDA margin, and a 28% net margin. By all profitability metrics, ADBE handily outperforms its sector and the market.
Cash-flow productivity is also impressive, as the company has grown its cash from operations from $2.2 billion in 2016 to $7.2 billion in 2021. 2022 cash flow productivity will be even higher. Free cash flow exceeds net income, offering a very positive sign regarding earnings quality and sustainability. Adobe’s FCF margin stands over 30%.
Low Levels of Risk on the Balance Sheet
Adobe maintains a very healthy balance sheet. Current assets exceed short-term liabilities, indicating strong liquidity coupled with the company’s consistent cash flow. Debt levels are also low, with long-term liabilities amounting to $4.93 billion in the most recent quarter, about 3.1% of the company’s market cap. Long-term solvency issues, as a result, are highly unlikely.
The Recent Figma Acquisition
In September 2022, Adobe announced the acquisition of Figma for $20 billion in cash. The deal will also dilute Adobe’s shareholders as Figma’s employees are set to receive stock in the company. Adobe’s management indicates that the acquisition will add to the company’s collaboration capabilities, incorporating Figma’s solutions and users into Adobe’s ecosystem.
While the deal seems to make a lot of sense strategically, many analysts have expressed concerns that it is, in fact, too expensive. While Figma is a high-growth company, doubling its annual revenue, it still produces less than $0.5 billion in revenue, indicating a high acquisition multiple. That is, in the midst of a highly-uncertain period for the stock market. Analysts fear that the deal can negatively impact Adobe’s profitability and cash-flow production, especially in the short term.
ADBE’s Valuation is Closer to Being Attractive
Adobe is probably the type of company that investors shouldn’t mind paying a premium price for, and the stock’s valuation over the past few years reflects that. While ADBE has traded at extreme valuations before, especially leading up to 2022, with P/E ratios over 40x and P/S ratios above 10x, its valuation multiple seems more moderate now.
Despite that, the company still trades significantly higher than market averages in terms of P/E and P/S ratios. Currently, ADBE trades at a 24.8x forward earnings multiple and a 9x forward sales multiple (for Fiscal 2022). Both metrics, however, are near their five-year lows recorded earlier this year. On a price/FCF basis, Adobe’s valuation looks improved, offering a 20x forward multiple.
Is ADBE a Good Stock to Buy, According to Analysts?
Turning to Wall Street, Adobe has a Moderate Buy rating based on 12 Buys and fourteen Holds assigned over the past three months.
The average ADBE stock price forecast of $366.59 represents 7% upside potential, with a high price forecast of $475 and a low forecast of $310.
Conclusion
After all things are considered, Adobe is a proven growing technology company that displays strong financial metrics. Still, ADBE trades at relatively high multiples. For many investors, this premium price might still appear attractive, given the company’s market position and track record.
