Adobe (NASDAQ:) continues to solidify its market position. A partnership with Amazon (NASDAQ:) boosts the company’s digital marketing profile. Moreover, an Android app in its multimedia niche will expand its usability in video editing. Such innovations have helped take ADBE stock to new highs.
However, this optimism may have also taken the price-to-earnings (PE) ratio on Adobe — more than 50x as of Friday — beyond its growth rates. Although Adobe will continue to hold profound influence in both multimedia and digital marketing, investors should probably wait for a pullback before buying ADBE stock.
Adobe’s Deep Moats
Back in April 2018, I wrote that Adobe has prospered by building . For years, consumers knew ADBE best for its multimedia features. Adobe Acrobat, Photoshop, and the Flash platform have long served as its better-known offerings.
In recent years, the company has established another niche in digital marketing, utilizing its Adobe Experience Cloud. Subsequent acquisitions have expanded its reach. In 2018, the company bought Magento, a platform for e-commerce stores, and more recently, Marketo. Marketo acts as an end-to-end solution to manage the customer experience.
Now, it has continued to solidify its market position in both of its primary niches. Adobe has also partnered with Amazon to bring Magento Commerce stores to Amazon sellers. This move takes its rivalry with Shopify (NYSE:) to a new level and should further help ADBE stock long term.
It will also bring its Premiere Rush video editing software to Alphabet’s (NASDAQ:, NASDAQ:GOOG) Android operating system. As Alphabet also owns YouTube, this should allow users to make quick edits to videos shot on the spot.
Adobe will make Premiere Rush available for free initially but will levy a $9.99 a month subscription fee after the end of the trial period. In years past, Adobe might have sold this software for a one-time price. Now, it becomes one of the latest sources of recurring revenue. Many credit that recurring revenue model for boosting Adobe stock in recent years. ADBE stock has more than tripled since the beginning of 2016 and risen tenfold since 2011.
ADBE Stock is Ahead of Itself
Nonetheless, I find myself again holding the same view on ADBE stock that I had a year ago. Since that time, ADBE saw further growth, a sharp decline in the fall of around 25%, and then a steady recovery to new all-time highs in 2019. Now, there are again concerns about the valuation of Adobe stock. The shares gains have taken the PE ratio to almost 51 times earnings. Still, thanks to its profit growth, the forward PE sits at about 29x.
That may appear high, but that does not take the multiple far above averages over the previous five years. The days where ADBE stock supported PE ratios in the teens and twenties have disappeared as its activity in multimedia and digital marketing has brought a premium multiple. I do not see that changing in the near future.
Still, at about $275 per share, the price may have moved slightly ahead of itself. Analysts predict a 15.7% earnings increase this year and 23.9% next year. While impressive, these moves may not justify the current valuation. I don’t recommend that long-term holders of ADBE stock get out. However, I would not encourage buying at these levels either.
Final Thoughts on ADBE Stock
As Adobe solidifies its market position in its key niches, ADBE stock may stagnate in the near term due to valuations. Both the Magento partnership with Amazon and the expansion of Premiere Rush into the Android ecosystem will further solidify Adobe’s strong competitive moats.
However, at more than 52 times current earnings, I see little near-term upside. Moreover, a lingering trade war with China could put further pressure on ADBE stock. The moats ADBE has built as well as double-digit profit growth should make the equity a valuable long-term holding. However, given the valuation and current conditions, wait for it to return to a bear market before buying.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can at @HealyWriting.
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