Adobe Systems' (NASDAQ:ADBE) shares have risen more than 34% year-to-date and 68% over the past 24 months, and its strong outlook seems to indicate more success ahead. The company offers a variety of Software-as-a-Service solutions designed to help content creators and e-commerce companies. 

Its portfolio includes well-known products such as Photoshop, Reader, Acrobat, and Illustrator, along with other software products for video editing, design and prototyping, website user-experience management tools, marketing, and analytics. These services are increasingly being delivered on a cloud platform, which is proving to be extremely popular among customers.

Adobe is well-positioned to capitalize on numerous macro trends as a leading solutions provider for content creators and e-commerce vendors. Ubiquitous connectivity, demand for video content, and rising sophistication in content marketing are all indicative of a growing addressable market for Adobe's software. The proliferation of small businesses and side-hustles with online distribution channels is similarly a massive trend that should keep Adobe's services in demand.

A person uses Photoshop on a laptop

Image Source: Getty Images

Consistently impressive results, but investors aren't convinced

Adobe has been outpacing management's revenue growth forecasts this year, running a nearly 25% sales expansion year-over-year. Despite delivering three straight quarters of positive sales news, management only guided for 21% growth for the final quarter of the year—a figure that disappointed many investors and analysts who hold a much more bullish outlook on the company's potential. 

Adobe's operating expenses are rising more quickly than revenue, driven primarily by higher sales and marketing costs. This could represent a completely acceptable investment in future growth opportunities, but in the near term, it is causing margin compression and relatively less exciting profit expansion. Revenue growth of 25% that coincides with only 10% earnings growth must yield some returns on the back end, otherwise, the company will be settling into new products or marking strategies that won't deliver the same returns as its existing business. 

Adobe has very attractive operating metrics

Despite some of the concerns and nitpicking that detract from the bull growth narrative, Adobe still looks great on paper. Its 28.4% operating margin compares very favorably to the software industry's average of 11.7%, though peers like Oracle and Microsoft deliver wider margins with its offering. Adobe's exceptional profitability helps achieve an excellent 20.1% return on invested capital — more than six percentage points above the industry average. These figures indicate pricing power, a meaningful economic moat, strong demand, and efficient use of financial resources to deliver returns.

This is not a cheap stock to buy

Adobe trades at a 31.2 price-to-forward-earnings ratio, which is materially higher than the 26.3 software industry average. While the company has a strong growth outlook, it is not sufficient enough to bring the PEG ratio below 1.6. Adobe shares trade at similar premiums to industry averages based on price to free cash flow and its 40.3 EV/EBITDA. The stock does not pay a cash dividend, but it does have a sizable repurchase program that has delivered a buyback yield between 1.2% and 1.8% over the past five years. 

Adobe is one of the largest software companies in the world, with a brand that's visible to consumers and enterprises, and the company has been posting great fundamental results. As such, it is nearly impossible for this stock to fly under the radar, and investors should assume that valuation reflects that notoriety. 

While Adobe's valuation is above average among software stocks, it trades well within the range of profitability ratios. The company has several products leading in markets that are experiencing strong growth, and the outlook continues to look positive. 

All signs point to stability and expansion over the medium term for fundamentals, though margin compression and growth deceleration are potential risks for the bull narrative. If results continue to impress, Adobe stock has plenty of room to continue delivering returns after an impressive two-year run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.