Adobe stock price (NASDAQ: ADBE) approaches technical support and more attractive valuation
Adobe inc The stock price (NASDAQ: ADBE) has fallen more than 13% from its all-time high at the start of the month. Tech stocks have been under pressure, but Adobe has been significantly weaker than the sector since releasing third quarter results last week. This despite the fact that the company exceeded consensus estimates in terms of net income and achieved record quarterly revenue of $ 3.94 billion.
There are several reasons to believe that the stock has become fully valued after a strong performance following the first and second quarter results earlier in the year. Prior to last week’s report, the stock price was up 45% since the first quarter results were announced in March. Our estimate of Adobe’s fair value based on analyst forecasts is approximately $ 560. When the stock price was $ 670, that implied a 20% premium. This premium has since fallen to just 4.4%.
It should also be noted that Adobe CEO Shantanu Narayen sold 40,000 shares last week. This transaction was worth more than $ 24 million and represents approximately 10% of its stake in Adobe. This may indicate that insiders are not seeing an immediate rise in the share price.
Check out our latest analysis for Adobe
What kind of growth will Adobe generate?
Looking ahead, analysts predict earnings growth of 22% over the next two years. However, over the next 12 months, profit growth is expected to slow to just 13%, which is below both the software industry and the market in general. The chart below illustrates how earnings should decline in the short term, before rising again.
What this means for you:
Adobe is a high quality company with an enviable 31% operating margin which has enabled the company to generate a return on equity of over 40%. The company has many competitive advantages and a growing target market of digital marketers, designers and content creators. Aside from the appraisal, there is no reason to believe that the business does not have a very bright future.
Over the past five years, Adobe’s price-to-earnings ratio (P / E ratio) has fluctuated between 38 and 65, with a recent peak at 56. We don’t think P / E ratios are a tool for very robust valuation, but they can be useful for comparing a stock’s valuation to that of similar companies and its own trading history. They can also give us an idea of how optimistic the market is about a company.
The stock price is currently heading towards our intrinsic value estimate of $ 560, but may well trade at a lower level. The $ 535 level is a key support level where the 2020 high coincides with the 200 day moving average. This level would imply a small haircut and a P / E ratio of 44, which is closer to the 5-year low for this metric. This would give long-term investors a more attractive entry point, with more support than current levels.
Keep in mind that it may take a few more earnings cycles for sentiment to improve, unless the company improves its forecast. You can view analysts’ forecasts by clicking here.
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Simply Wall St analyst Richard Bowman and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.
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