What’s got Adobe stock down to a decade-low valuation? The Daily Breakdown digs into the spooky decline in ADBE stock.
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Deep Dive
Adobe Systems has been a trending topic on social media this year, seemingly overlooked in the broader tech rally despite its consistent business growth. Despite Adobe’s integration of AI into its products, concerns persist regarding the potential negative impact of AI on its business.
However, the company has continued to perform well. Adobe experienced some margin pressure between 2021 and 2023 but has since rebounded to the mid-30% range. Over the past decade, Adobe has consistently achieved at least 10% annual revenue growth without significantly sacrificing its margins, leading to a compound annual growth rate (CAGR) of approximately 26% in earnings over the same period.
Future Growth Projections
While Adobe has demonstrated strong growth historically, future growth is not expected to be as aggressive. According to Bloomberg, analysts project the following:
- Earnings growth: 13% this year, 12.2% in 2026, and 12.3% in 2027.
- Revenue growth: 10.2% this year, 9.3% in 2026, and 9.3% in 2027.
Analysts currently have a consensus price target of ~$457.50 on ADBE stock, implying almost 34% upside to today’s stock price. The disconnect between the stock price and what investors feel is a fair price has many investors puzzled.
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Diving Deeper — Valuation and Risks
Because the business has continued to chug along but the price of Adobe stock has not, the valuation has come down significantly over the years. Below is a look at the forward price-to-earnings ratio and the forward price-to-free-cash-flow ratio. Both are are at 10-year lows.
Risks
Investors see the company is growing, but they can’t ignore what else they see; ChatGPT and other AI applications are now creating pictures and videos. If sales and margins were to come under pressure, that could cause further fear of the stock.
Adobe has been an underperformer amid this bull market as it lingers near its 2023 lows and is down about 30% so far this year. Some investors will see that as an opportunity, while others will find it to be a red flag, given the performance of the S&P 500 and Nasdaq 100. Ultimately, investors will have to decide if the valuation and business are compelling enough and if the current fears are justified or overblown.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.