Has Adobe Stock Hit A Ceiling?

After a 40% rally off the March bottom, Adobe’s stock (NASDAQ:ADBE) seems to have run out of room to grow at the current price of around $425 based on our estimate for Adobe’s valuation. Notably, this is similar to the 40% growth in the S&P 500 over the same period. We believe Adobe now has limited upside potential. The key is the company’s stock is at an all-time high. Our dashboard ‘What Factors Drove 134.9% Change In Adobe Systems Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

Some of this rise over the last 2 years is justified by the roughly 53% jump seen in Adobe’s revenues from 2017 to 2019. Net Income Margin also rose from 23.2% in 2017 to 26.4% in 2019, helping EPS swell 77% thanks to the added benefit of share buybacks. Specifically, the company has invested about $4.7 billion in repurchases in the last two years, resulting in about 1.5% lower outstanding shares. While Adobe had about $3 billion in cash as of the last report, we believe it is not likely for the company to sustain this level of buybacks.

Finally, Adobe’s P/E ratio grew from about 51x at the end of December 2017 to 54x at the end of December 2019. Further, post-Q2 2020 earnings (ended May 2020) Adobe’s P/E has shot up to about 68x now. We believe that the market is being overly optimistic about the tech company, which is leading to an inflated figure. After all, the figure has largely been in the 50-55x range over recent years.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Notably, Adobe’s stock is up by about 20% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 3%. The outbreak actually helped Adobe’s stock, with the company recording positive revenue growth in Q2 2020 (ended May 2020) due to consumers’ shift to remote work led to a higher focus on Cloud experience and web-based services. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for the services.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off in March compares.

While Adobe’s stock is at an all-time high, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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