Even Without the Trade War, Adobe Stock Won’t See $300 Anytime Soon

The valuation on Adobe stock is a little too hot

If you put $1,000 into Adobe (NASDAQ:ADBE) at the end of 2011, today that Adobe stock would be worth $9,849, a compound annualized return of 35.7%.

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So far in 2019, ADBE stock is up 23% year to date through May 10. If Adobe can meet its average annual return over the past seven-and-a-half years, it will hit $300 with a little room to spare.

Given the stock’s momentum, it seems like an absolute certainty. However, others would argue that its valuation is far too stretched, suggesting $250 is a more likely scenario for the end of the year.

Here’s an argument for both prices.

Adobe Is a $300 Stock

Adobe stock has taken in the trade war and the Chinese recent retaliation. The Chinese, in a tit-for-tat move, added tariffs to $60 billion in American exports to China, scaring the heck out of investors and sending the major indexes down by more than 2%.

President Trump is playing the ultimate game of chicken. However, cooler heads will prevail because no one wants a protracted trade war between the world’s two largest economies. When that day comes, and the trade negotiators deliver a workable deal, Adobe’s move higher should resume to $300.

A big reason why Adobe stock will continue moving higher has very little to do with a trade deal and everything to its business functioning at a very high level of efficiency.

At the end of April, Adobe’s stock got a ratings upgrade from Morgan Stanley analyst Keith Weiss who upped it from equal weight to overweight while also increasing his 12-month price target by 21% to $340, providing investors with 26% upside from current prices.

Adobe should sustain a 20%+ EPS compound annual growth rate over the next three years, even if digital-media growth begins to wane, given improving segment profitability and ramping digital-experience growth,” Weiss wrote in a note to clients.

He’s not the only analyst who likes Adobe. A total of 19 analysts have an overweight or buy rating on the stock with 12 analysts giving it a hold rating. None of the 31 analysts covering it gives it an underweight or sell rating.

Of course, when you’re growing earnings per share by 20% or more a year, it’s easy to see why no analysts are negative about the company.

As for target prices, Weiss’s is highest at $340 with the average just under $300 at $296.68.

From where analysts are sitting, Adobe looks primed to hit $300 by the end of 2019.

Adobe Stock Is Only Worth $250

In March, Adobe reported its first-quarter results and they were very strong with its digital media segment up 22% year over year while its digital experience segment increased revenues by 34% on the back of two acquisitions; Marketo for $4.7 billion and Magento for $1.6 billion.

In fiscal 2019, Adobe expects its digital media segment’s revenues to grow by 20% while its digital experience segment should see revenues grow by 34%, again thanks in large part to its two acquisitions.

Most important, it expects non-GAAP earnings per share in fiscal 2019 to grow by 15% from $6.76 in 2018 to $7.80 in 2019. While the $7.80 figure is likely a conservative estimate (it increased guidance from $7.75 after the first quarter) earnings have got to hit $8.11 a share or higher to meet Weiss’ three-year grow rate mentioned above.

Considering both its price-to-sales and price-to-cash flow ratios are higher than its peers, and its five-year historical average, any growth below 20% will have to be viewed by investors as a failure to deliver.

While I agree with InvestorPlace contributor Tezcan Gecgil that Adobe is a good long-term investment given the strength of its cloud-based products. Furthermore, it probably would make an attractive acquisition for Microsoft (NASDAQ:MSFT).

However, valuation in a volatile market remains a major sticking point to a higher stock price.

More bad news on the trade front could put tech investors in an extended selling mood making $250 a real possibility.

The Bottom Line on Adobe Stock

It’s important to remember that Adobe was trading below $210 as recently as December. Therefore, it’s more than possible that its share price will drop to $250 or even lower.

Long-term, like my colleague, I believe Adobe stock is a winner. I would wait to see how this trade war plays out before buying. If you already own, I’d continue to hold, buying more in the $250s.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/trade-war-adobe-stock-300/.

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