Goldman Says Adobe Has Pricing Power. Here’s What to Expect.

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ADBE Stock - Goldman Says Adobe Has Pricing Power. Here’s What to Expect.

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Goldman Sachs (NYSE:GS) rates Adobe (NASDAQ:ADBE) stock as a top “pricing power” pick and believes it will perform well in the next quarter. Adobe’s 85% gross profit margin suggests that the company exhibits economies of scale. The cheaper cost of goods allows Adobe to absorb rising input costs at minor damage, causing much reason to be optimistic about the firm’s quarterly prospects.

Although Adobe produced a disappointing first-quarter earnings report, I think its prospects remain bright. First off, the company boasted an earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 22.28% during the past year as its key segments grew solidly. To elaborate, Adobe’s digital media segment achieved revenue worth $3.11 billion, and its digital experience segment added $1.06 billion in revenue.

Adobe’s latest numbers are respectable. However, I believe there’s more in the tank. The company’s Beneish M-Score of -2.81 suggests that it could be holding back some of its earnings with conservative accounting measures. The M-score shows how aggressively a company recognizes its earnings, and a ratio below -1.78 indicates that we could see a positive earnings surprise in the future. Besides, I can easily see enterprise spending picking up again as we exit this temporary economic snag caused by geopolitical and monetary events.

Furthermore, ADBE stock illustrates attractive style factors with its return-on-equity and return-on-invested-capital running at 35.34% and 21.44%, respectively. The latter of the two metrics tells us that Adobe’s holding down a strong market position while the prior conveys a good balance of leverage, asset utilization, and profit margins.

Lastly, ADBE stock is undervalued on a normalized basis. The stock’s trading at a price-to-sales discount of 19.77% and a price-to-cash-flow discount worth 23.83%. Additionally, ADBE is currently trading at a low Relative Strength (40.22), meaning that there market’s underappreciated the asset lately.

With all aspects considered, I’d say that Adobe stock has upside in the offing. Thus, like Goldman, I’m bullish on this one!

On the date of publication, Steve Booyens did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


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