Shares of creative software developer Adobe (ADBE) have been on the receiving end of the latest tech dip, plunging by around 26% from peak to trough. Undoubtedly, unprofitable tech has taken a brunt of the damage, with some Cathie Wood holdings shedding over 50% of their value.
Profitable, but expensive growth like Adobe hasn’t been spared. While it’s difficult to determine how much such incredibly profitable growth stocks will be dragged down alongside the speculative nosebleed-level plays, I do think the recent drawdown in Adobe seems a bit overdone.
Unlike many red-hot stocks valued on a price-to-sales basis, Adobe has compelling cash flows, and a means to improve its margins. It’s not only profitable, but it could grow even more profitable over the next few years. As rates rise, I think Adobe is a wonderful company that can hold its own, even if the unprofitable growers continue dragging the tech sector south.
Further, Adobe isn’t just a creative software company with some of the most powerful and recognized tools in its industry; it also has the means to upsell customers as new technological opportunities emerge. The metaverse is a topic of discussion of late, and it will be full of creativity, bringing forth the need for creative tools like those offered by Adobe.
Although it’s tough to gauge just how strong the metaverse tailwind will be for Adobe, I do think it’s heavily discounted at this juncture. I am bullish on Adobe stock and think nothing fundamental has changed for the worse.
Adobe: A Wonderful Business
Adobe shares similarities to its bigger brothers in the FAANG basket. It’s an older company that’s managed to continue raising the bar on its growth. Adobe hasn’t just grown at an impressive rate into maturity, but it’s also been growing very profitably. Thanks in part to the company’s cloud transition, operating margins have been on a steady upward trajectory over the past several years.
Adobe seems to possess the perfect one-two punch in the form of high double-digit revenue growth and margin expansion potential.
It’s not just the Creative Cloud that many know Adobe best for; the firm’s intriguing Experience Cloud has allowed the firm to grab a front-row seat to some very fast-growing markets with some very different types of clients (think advertisers as opposed to artists). The growth runway is long, and management continues to find ways to add even more to its already comprehensive solution suites.
The Creative Cloud saw sales rise 19% year-over-year in Q4 2021, thanks in part to strength in Creative Cloud for Teams and robust renewals. Indeed, Adobe is in a class of its own, and the moat protecting its economic profits is quite wide.
As we gradually shift into the metaverse, expect Creative Cloud to get an even larger boost.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, ADBE stock comes in as a Strong Buy. Out of 24 analyst ratings, there are 18 Buy recommendations and six Hold recommendations.
The average Adobe price target is $674.67. Analyst price targets range from a low of $600 per share to a high of $765 per share.
The Bottom Line on Adobe Stock
Adobe stock has been punished harshly and for no good reason other than a valuation reset.
From a fundamental standpoint, the trends are a friend of Adobe. Such fundamentals could improve drastically as the narrative changes and potential metaverse tailwinds are factored in.
In any case, Adobe remains a somewhat expensive stock, even after its bear market moment. At 46.9 times trailing earnings and 18 times sales, Adobe is pricey enough such that a continuation of the broader tech sell-off could continue to weigh heavily on ADBE stock.
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