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Profits and Growth Priced Into Adobe Systems Incorporated Stock

ADBE stock - Profits and Growth Priced Into Adobe Systems Incorporated Stock

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Adobe Systems Incorporated (NASDAQ:ADBE) has produced high returns for both long- and short-term investors recently. Its suite of Adobe Creative products has generated both user and investor interest. Also, its current management team, which recently announced a change, has led ADBE to outsized profit growth over the last few years.

However, given the growth of the stock price recently, both current owners and prospective owners need to reconsider positions in ADBE stock.

Stable Management and Deep Moats

As a company, I love Adobe Systems. It stands as one of the more stable companies in all of tech, and it produces great products that competitors struggle to copy or surpass. They can also boast of a strong, stable management team, even amid recent changes.

The announcement of John Murphy as its new EVP and CFO on Apr. 9 comes as a promotion from within. Also, the outgoing EVP and CFO, Mark Garrett, had held the position since 2007. The manner in which Adobe has handled this management change should keep any disruptive effects to a minimum.

A strong line of products also backs Adobe stock. In an earlier article, I touted ADBE’s ability to build moats. While I currently do not hold a position in ADBE stock, I have used Adobe Photoshop for various functions.

Given what the software can do, I can attest to its moat. Photoshop has become indispensable to many media professionals and hobbyists. Copying this product, let alone surpassing it, would take considerable effort and investment.

The latest addition to the Adobe Creative Suite (and possibly its next moat) will work in the artificial intelligence (AI) space. This product, called Adobe Sensei, will be optimized to work with chips made by Nvidia Corporation (NASDAQ:NVDA).

Nvidia has become a leading chipmaker in this space. This alliance joins two companies that are among the best in their fields. Given the competition, they will likely need this partnership and its alliance with Microsoft Corporation (NASDAQ:MSFT)., inc. (NYSE:CRM), Apple Inc. (NASDAQ:AAPL) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) also compete in the AI software space.

Adobe Stock Appears to Lack a Good Entry Point

Software innovation continues to boost ADBE stock. Since recommending ADBE in early November, the equity has risen by nearly 30%. However, I also said at that time the trend could be entering the fourth quarter. Considering the “points” scored since that time, I think it is game over for now.

The price-to-earnings (PE) ratio has climbed to 60. While not a record-high multiple, it stands well above averages from earlier in the decade.

Profit growth has averaged over 15% per year over the last five years. This growth rate, although impressive, has not reached a level high enough to justify a multiple of 60. Our own Serge Berger confirms this instinct, calling today’s price a “less than optimal” entry point.

The stock has also retreated twice from the $229 per share level. Since the stock currently trades in the mid $220s per share, it remains too early to call this a downtrend. Still, I expect ADBE stock will either pause or mildly correct in the near term.

Longer term, profit growth has become too strong to stay bearish. Consensus estimates for 2018 earnings stand at $5.35 per share. Analysts predict net income to rise to $5.96 per share in 2019 and $7.29 per share in 2020.

Long-term holders should ride out any temporary pullbacks. However, those in ADBE stock for a trade should consider reducing or closing their positions at this level.

Bottom Line on ADBE Stock

ADBE stock has become one of the most robust equities in American tech. However, given recent stock price growth, prospective buyers should hold off for now.

Finding negative things to say about ADBE is a difficult task. The company boasts a stable management team. Moreover, product innovation also continues. Adobe Sensei could become its next moat as it seems to complement Nvidia’s advances in the AI field.

Unfortunately for would-be buyers, the attributes of the company and its product line appear priced into the stock. Furthermore, large gains followed by a pause in the ADBE stock price indicate a less-than-ideal buying opportunity.

Long-term, I expect Adobe stock will continue to perform well. However, the equity is not well positioned to benefit new buyers or short-term players at this time.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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