Is Adobe Stock Poised for a Rally?

We think Adobe (ADBE) stock could be a good value buy. It is currently trading lower than average valuation, and has reasonable revenue growth and strong margins to go with its modest valuation.

Buying stocks with low valuations or trading well below their peaks but maintaining strong margins allows investors to capture mean reversion and valuation re-rating potential. The downside risk is potentially less because high-margin businesses can sustain earnings and recover faster when sentiment or market conditions improve

What Is Happening With ADBE

ADBE may be down -11% so far this year but is now 33% cheaper based on its P/S (Price-to-Sales) ratio compared to 1 year ago, and also trades at a P/E (Price-to-Earnings) ratio that is below S&P 500 median.

The stock may not reflect it yet, but here is what’s going well for the company. Adobe’s robust subscription model fuels strong cash generation, exceeding $3.16 billion in Q4 FY2025 operating cash flow, bolstered by June 2025 Creative Cloud pricing adjustments that included new AI features. While digital media ARR growth faces market scrutiny due to emerging AI tools, Adobe forecasts over 10% total ARR growth for FY2026, driven by rising adoption of its AI-embedded offerings. The current valuation discount reflects investor questions about competitive pressures and the pace at which its AI innovations will translate into significant new revenue streams.

ADBE Has Strong Fundamentals

• Reasonable Revenue Growth: 10.7% LTM and 10.5% last 3 year average.
• Strong Margin: Nearly 35.4% 3-year average operating margin.
• No Major Margin Shock: Adobe has avoided any large margin collapse in the last 12 months.
• Modest Valuation: Despite encouraging fundamentals, ADBE stock trades at a PE multiple of 18.8

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

*LTM: Last Twelve Months

But What Is The Risk Involved?

While ADBE stock may be a compelling investment opportunity, it’s always helpful to be aware of a stock’s history of drawdown. Adobe’s stock took some serious hits during market crises. It lost about 72% in the Dot-Com bubble and 67% in the Global Financial Crisis. The inflation shock in 2022 wasn’t far behind, with a 60% drop. Even the less severe pullbacks, like in 2018 and the Covid pandemic, still shaved off more than 25%. So, no matter how solid the company looks, big sell-offs tend to hit even top names hard. 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.

For more details and our view, see Buy or Sell ADBE Stock.

Stocks Like ADBE

Not ready to act on ADBE? Consider these alternatives:

1. PayPal (PYPL)
2. Lululemon Athletica (LULU)
3. Global Payments (GPN)

We chose these stocks using the following criteria:

1. Greater than $2 Bil in market cap
2. Meaningfully below 1Y high
3. Current P/S < last few year average
4. Strong operating margin
5. P/E ratio below S&P 500 median

A portfolio of stocks with the criteria above would have performed has follows since 12/31/2016:

• Average 6-month and 12-month forward returns of 12.7% and 25.8% respectively
• Win rate (percentage of picks returning positive) of > 70% for both 6-month and 12-month periods
• Strategy consistent across market cycles

Portfolios Beat Stock Picking

Stocks soar and sink – the key is staying invested. A balanced portfolio keeps you in the market, boosts gains and reduces single stock risk

The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.