Adobe (NASDAQ:ADBE) stock is a name to hold. Shares recently approached all-time highs. Even though the company has not fundamentally changed, investors very recently were selling in order to book profits, thus driving prices down.
Markets are taking a collective pause to consider whether Adobe is overinflated. Yet, digital marketing and media are not going into decline any time soon.
Adobe will post third-quarter earnings Sept. 15. Prices are likely to be steady until that date. Investors should wait before taking any long-term position in Adobe. Ultimately, investors considering ABDE stock need to balance profitability against valuation and see how they feel.
ADBE Stock Is a Star
Adobe has been running up in price steadily for several years. Its creative cloud software including household names Photoshop, Illustrator, and Acrobat certainly justify some of that rise. These are great products that are becoming more and more useful in our increasingly digital world.
The company has ridden a tech wave which has seen massive price appreciation as we become increasingly reliant upon technology to do our jobs.
Adobe does what investors want companies to: it makes money efficiently. Gross margin is 83.4%. Sure, that’s partly due to the nature of what it sells. But credit is due. If investors compare that figure to two of Adobe’s competitors, Adobe comes out on top. Salesforce (NYSE:CRM) reported a gross margin of 68%, and DocuSign (NASDAQ:DOCU) showed a gross margin of 73.8%.
That’s part of the reason markets have been so bullish on Adobe over the recent quarters. The company undoubtedly has a great business. But there are questions regarding valuation that are starting to creep up. Namely, are shares of ABDE stock overpriced?
Signs Say Maybe
Investors who look at what has happened to one of the aforementioned competitors may say yes. DocuSign has had a tumultuous week during which prices have bounced all over the place. A recent Barron’s article should give Adobe shareholders pause.
Despite strong earnings the company’s stock price has dropped by about 20% in three days.
Revenue increased 45% from a year earlier, and billings were up 61% in the same period. The only real explanation is that, as the author put it, markets are “queasy” about the high valuations.
Importantly, the conclusion was that DocuSign is not broken. The markets simply needed to correct its price. The same could very well be true of Adobe. In fact, given what has transpired in the past few days, it may already be underway.
Analyst Note on Tech Valuations
Deutsche bank analyst Taylor McGinnis had this to say about the price increase of cloud stocks during the pandemic:
“DocuSign’s shares are on an amazing run since the initial market crack and now trade at a [January 2022 fiscal year] revenue multiple of 26 times, this represents a deserving premium to the peer group as accelerating key financial metrics will no doubt support durable growth in the future, but at these levels the risk/reward seems more balanced near-term.”
Again, there’s nothing to suggest that ADBE stock is broken, but rather overvalued.
The Takeaway on Adobe
Adobe looks to be in a cooling period. It’s still a great company and still a strong stock, but sentiment drives the market.
Investor sentiment drove cloud stocks to their current prices. Sentiment may be shifting to a period of flatter prices. So, despite all of the amazing metrics coming out of an Adobe or a DocuSign, an upward march won’t persist indefinitely.
I would hold this stock. Certainly, investors who purchased during the trough are happy. The stock shouldn’t drop anywhere near that, though. But given what has occurred with DocuSign, I wouldn’t go pick up ADBE stock right now.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.