Does Adobe’s Stock Have 20% Growth Potential?

ADBE: Adobe logo

[Updated 02/04/2021] Adobe Update

Having grown 43% since the end of 2019, Adobe’s stock (NASDAQ: ADBE) still has potential to grow. ADBE’s stock grew from $330 at the end of Dec 2019 to near $480 now, compared to the S&P 500 which gained 16% since the end of 2019. The company has seen revenue rising over recent years, while its P/E multiple has also risen. Our dashboard Buy or Sell Adobe Stock has the underlying numbers.

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Despite the Covid-19 crisis, ADBE saw its revenue rise by 15% in the FY 2020 (ended November 2020) with Digital Media and Digital Experience segments leading the growth. In FY 2020, ADBE beat consensus estimates for revenue at $12.9 billion, up 15% y-o-y, and earnings were recorded at $10.94 compared to $6.07 in the same period of the previous year. Earnings were accentuated by $1.1 billion of one-time tax benefit in FY 2020. Further, the company reported $5.7 billion of cash inflows from operating activities for the year.

We expect Adobe’s revenues to rise by 18.2% to $15.2 billion for FY 2021. Further, its net income is likely to fall (as it was inflated last year due to a one-time tax benefit) to $3.6 billion, decreasing its EPS figure to $7.50 in FY 2021, which coupled with the P/E multiple of around 75x will lead to Adobe’s valuation around $567, which is 20% higher than the current market price.


[Updated 10/13/2020] Adobe’s Stock To Continue Growing? 

Despite more than a 63% rise from its March lows of this year, at the current price near $502 per share, we believe Adobe’s stock (NASDAQ: ADBE) is still undervalued. ADBE stock has increased from $307 to $502 since March 23rd compared to the S&P 500 which increased almost 55% from its recent lows. The stock has outperformed the market and was at a 52 week high in early September. The company has benefited from a subscription-based business model which helps with continuous revenue flow. In the first nine months (ended August 2020) of FY 2020 Adobe saw revenue grow to $9.4 billion, up by 15% y-o-y while earnings were recorded at $6.25 compared to $4.31 in the same period of the previous year.

The 175% rise in ADBE stock price between FY 2017 to FY 2019 is justified by significant growth in earnings during those two years. Adobe’s Revenue increased 53% from $7.2 billion in FY2017 to $11.2 billion in FY2020 (FY ends in November). This effect was amplified by margins increasing from 23.2% to 26.4% during this period. On a per share basis, earnings went up from $3.43 to $6.07. Higher revenue and margins were driven by overall industry growth and innovative solutions.

During the same period, the P/E multiple declined slightly from 52x to 51x. This was because the rise in stock price was lower than the growth in EPS. The P/E jumped in 2020 following the outbreak of coronavirus pandemic as more and more organizations were switching to remote working and faster digital transformations. Currently the multiple stands at 83x and is likely to see a modest upside as the current crisis abates.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. With the majority of people working from home, the demand for Adobe’s solutions has increased. This was evident to a certain extent from the recently released Q3 2020 results of ADBE for the quarter ending August 2020. Revenue increased by 14% while earnings increased by 22% on a y-o-y basis. Remaining Performance obligation surpassed $10 billion at the end of the quarter.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, focusing their attention on FY 2022 results. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. 

While Adobe may have moved, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy. Another example is Apple vs Microsoft.


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