What happened
Powerhouse tech stock Adobe (ADBE -0.60%) fell 12.5% in February, according to data from S&P Global Market Intelligence. There was no major news about the company's financials, and the stock was highly correlated with the Nasdaq. Adobe was dragged down with other tech stocks as the market grappled with high valuations, rising interest rates, and the conflict in Ukraine.
So what
Sometimes, there's nothing a business can do to influence its stock price. Adobe lost around $30 billion in market value last month, even though nothing really changed about the company's financial situation.
Image source: Getty Images.
Its chart shows clear correlation to the Invesco QQQ exchange traded fund (ETF) and the ProShares UltraPro QQQ ETF. This indicates that Adobe is moving in conjunction with large-cap tech stocks, and it's more volatile than many of its large peers.
ADBE Total Return Level data by YCharts
That's not shocking, but the level of volatility is a bit of a surprise. Adobe's forward price-to-earnings ratio and enterprise-value-to-EBITDA ratio are both around 33. Those aren't particularly high, so the stock's valuation isn't out of control. Its trailing P/E ratio is around 45, and price-to-book is around 14.5. For comparison, the average P/E ratio in the Invesco QQQ Trust is around 36.5, and price-to-book in the ETF is 9.3. Obviously Adobe's valuation ratios are a bit higher, which contributes to extra volatility. Still, it's noteworthy that an established, profitable giant like Adobe would nearly triple the index's losses like that.
Now what
Adobe reports first-quarter earnings on March 22, so that could break up its correlation to market indexes. Wall Street is expecting 15% sales growth for the quarter. That growth rate would be a slowdown from the 20% that was delivered in the fourth quarter, and well below the 23% increase in remaining performance obligations (RPO), which represent revenue for future periods.
Better-than-expected results paired with a strong outlook should lead to a nice bump for Adobe shares. Otherwise, expect the stock to remain correlated to other tech stocks. For investors who like Adobe's position in the creativity and productivity software markets, this downturn could present a great chance to buy some shares for the long haul.
