Adobe Stock Is Cooling Off But There Are Two Big Tech Stocks That Outshine It In Value

Adobe (NASDAQ:ADBE) stock has been trading sideways this year, declining by about 4% year-to-date. This compares to the Nasdaq-100, which has gained about 18% over the same period. It may be time to look elsewhere. At the moment, we find search behemoth Alphabet (NASDAQ:GOOG) and social media titan Meta Platforms (NASDAQ:META) more attractive than Adobe.

Why? Simply because the valuation and growth numbers tell us so. Alphabet and Meta Platforms stocks have both seen higher growth in revenue and operating profits than Adobe in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Adobe.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than ADBE – GOOG & META Stocks?

Specifically, to illustrate the opportunity for Alphabet, you pay $21.25 per dollar of earnings-before-interest-and taxes (EBIT) for GOOG stock versus $35.13 for ADBE, and get higher annual growth (13.4% vs 11%), higher quarterly growth (14% vs 10.2%), and better margin trend (4.1% vs 1.8%). Overall, you get higher revenue, and operating profit growth from Alphabet and Meta Platforms, and pay less than for ADBE stock. See our complete dashboard analysis of Better Bets Than ADBE Stock

So What’s The Catch?

Now, could Adobe buck the trend? Could it grow its revenues and profits much faster than Alphabet or Meta Platforms in the coming quarters? Of course that’s possible. Adobe’s Q2 FY’24 earnings were stronger than expected, with revenue rising 10% year-over-year to $5.3 billion. Adobe could continue to benefit from higher revenues from its Creative Cloud, Document Cloud, and Experience Cloud offerings as well as expanding margins. For example, operating margins also expanded by 180 basis points to 35.5%.

Moreover, we also believe that Adobe stock also sees less regulatory risk compared to the big tech titans. While Google is plagued with considerable scrutiny relating to potential monopolistic practices and data privacy, including a recent antitrust ruling by a U.S. judge, Meta’s offerings face challenges relating to privacy issues and misinformation. This means that Adobe – which focuses on creativity software and services – has somewhat better business continuity and revenue stability.

The point? The data in our dashboard shows both Alphabet and Meta Platforms outperformed Adobe recently and over the last year. They might repeat this. Related Ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Adobe, To Get More Revenue And Profit Growth?

While META has seen the strongest revenue growth of the three both in the last twelve months and the last quarter, ADBE has seen the slowest growth over the period. Moreover, ADBE margins have seen less of an expansion versus peers over the last twelve months. However, despite this, ADBE  stock trades at a higher price-to-operating income ratio of 35x, compared to 26x for Meta and 21x for GOOG.

What About Relative Market Returns?

META stock has shown a stronger market performance, with returns of  11% over the past 6 months, and 86% over the past 12 months. In comparison, ADBE returns for the same periods were weaker at 15.5%, and 19.5%, respectively, although it outperformed marginally over the last 3 months.

How Did These Metrics Look 1 Year Ago – Could ADBE’s Combination Of Higher Valuation & Lower Growth Persist?

ADBE still had a higher valuation of $40.35 vs $22.7 for GOOG, but higher annual growth (10.4% vs 4.1%), higher quarterly growth (9.8% vs 7.1%), and more favorable margin change (-2.6% vs -3.9%).  The situation looks quite different now which means that market reward could switch in favor of GOOG and META.

Additional Reference Metrics

Alphabet has one of the widest moats in the tech industry, serving as a gateway of sorts to the web via dominance in the search business. Although Google has seen some hiccups with the generative AI deployment, we believe that it could have an edge over rivals in the long run, given its massive distribution, via search and Android. YouTube, which is seen steadily growing engagement, accounts for a 9.9% share of U.S. TV viewing time ahead of even Netflix. Moreover, Google’s cloud business is also expanding at a rapid clip, growing sales by about 29% to $10.35 billion in Q2. Moreover, the company also has one of the most reasonable valuations among big tech companies. See our analysis of Alphabet’s Valuation

Meta’s gigantic advertising business has been expanding steadily, driven by the expansive global reach of its social networks and steady product improvements. While profit growth was weighed down in recent years by Meta’s sizable investments into developing the metaverse, which has a questionable payoff in the eyes of investors, the company appears to be switching gears, investing less in the metaverse, while doubling down on generative AI. The company has also been cutting costs to boost profitability.  See our analysis of Meta’s Valuation

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/23/2024
[2] Cumulative total returns since the end of 2016

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