Adobe Stock Pullback: A Chance to Ride the Uptrend

Adobe (ADBE) stock might be a good buy now. Why? Because you get high margins – reflective of pricing power and cash generation capacity – for a discounted price. Companies like this generate consistent, predictable profits and cash flows, which reduce risk and allow capital to be reinvested. The market tends to reward that.

What Is Happening With ADBE

ADBE may be down -21% so far this year, but the silver lining is that it is now 32% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago.

The stock may not reflect it yet, but here is what’s going well for the company. Adobe’s robust gross margins, approaching 90%, are bolstered by strong demand and strategic AI monetization. The company is actively integrating generative AI tools like Firefly, with AI-first offerings projected to exceed $250 million in annual recurring revenue by year-end 2025. Creative Cloud paid subscribers are estimated at 41 million by year-end 2025, an increase of 4.24 million from last year. Enterprise pricing adjustments of 6-8% in 2024-2025 for Creative Cloud Edition 4 also reflect pricing power. This, combined with record Q2 and Q3 2025 operating cash flows of $2.19 billion and $2.20 billion respectively, and a raised FY2025 revenue guidance to $23.65-$23.70 billion, demonstrates underlying strength despite the stock’s approximately 20% year-to-date decline.

ADBE Has Strong Fundamentals

• Recent Profitability: Nearly 42.2% operating cash flow margin and 36.2% operating margin LTM.
• Long-Term Profitability: About 39.0% operating cash flow margin and 35.4% operating margin last 3-year average.
• Revenue Growth: Adobe saw growth of 10.7% LTM and 10.5% last 3-year average, but this is not a growth story
• Available At Discount: At P/S multiple of 6.4, ADBE stock is available at a 32% discount vs 1 year ago.

Below is a quick comparison of ADBE fundamentals with S&P medians.

*LTM: Last Twelve Months

Don’t Expect A Slam Dunk, Though

While ADBE stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. ADBE fell about 72% in the Dot-Com crash, 67% in the Global Financial Crisis, and 60% during the inflation shock in 2022. Even the less severe dips in 2018 and the Covid selloff came close to 25%. This shows that no matter how strong a company looks, it can still take major hits in tough markets. But the risk is not limited to major market crashes. Stocks fall even when markets are good – think events like earnings, business updates, outlook changes. Read ADBE Dip Buyer Analyses to see how the stock has recovered from sharp dips in the past.

If you want more details, read Buy or Sell ADBE Stock.

How We Arrived At ADBE Stock

ADBE piqued our interest because it meets the following criteria:

1. Greater than $10 Bil in market cap
2. High CFO (cash flow from operations) margins or operating margins
3. Meaningfully declined in valuation over the past 1 year

But if ADBE doesn’t look good enough to you, here are other stocks that also check all these boxes:

1. Visa (V)
2. Salesforce (CRM)
3. Comcast (CMCSA)

Notably, a portfolio that was built starting 12/31/2016 with stocks that fulfil the criteria above would have performed as follows:

• Average 12-month forward returns of nearly 19%
• 12-month win rate (percentage of picks returning positive) of about 72%

Move Beyond Single Stocks With A Multi Asset Portfolio

Individual picks are volatile but diversified assets offset each other. A multi asset portfolio helps you stay the course capture upside and reduce downside.

The asset allocation framework of Trefis’ Boston-based, wealth management partner yielded positive returns during the 2008-09 period when the S&P lost more than 40%. Our partner’ strategy now includes Trefis High Quality Portfolio, which has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices