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.

Our dashboard What Factors Drove 179% Change In Adobe Systems Stock Between 2017 And Now? provides the key numbers behind our thinking.

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. With investors focusing their attention on 2021 results, the valuations become important in finding value. Expectations of revenue and earnings rising due to the continuous digital transformation initiatives and with investors’ focus shifting to the 2021 numbers, Adobe’s stock could see an upside in the near term. As per Adobe’s valuation by Trefis, we have a price estimate of $554 per share for ADBE’s stock, reflecting almost a 10% potential rise from its current level.

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