Adobe's (ADBE 1.29%) stock is down 40% this year, but that doesn't mean the business is headed for trouble. A common mistake investors make is associating the performance of a stock with the performance of the underlying business. In many cases, a stock can go down even though the business is doing just fine. Adobe's stock was probably overvalued at the start of the year, but now, it may arguably be a steal of a deal. Here are three charts that highlight why I think this may be one of the best stocks to buy heading into 2023.
Adobe's margins are incredible
One of the most important things for investors to consider are a company's margins. From gross margin to operating margin, it's crucial to know how much of every dollar of revenue is making its way to gross profit and operating profit. In Adobe's case, it's a lot:
ADBE Gross Profit Margin (Quarterly) data by YCharts
That chart above says that $0.33 of every dollar goes straight to the company's operating profit. And a big reason for that is that Adobe's gross margin is so impressive at more than 87%. The company's margins are fantastic as its popular software products, including Photoshop and Illustrator, are primarily available at fairly high subscription prices.
Another important thing to note about that chart: Despite inflation and rising interest rates, the company's margins have remained solid throughout the past few years.
Demand has been resilient
Even though Adobe's prices aren't cheap, demand hasn't fallen over a cliff, suggesting that like Apple, Adobe caters to a more affluent clientele, one that potentially has more purchasing power and resiliency amid inflation.
ADBE Revenue (Quarterly YoY Growth) data by YCharts
Even if the pandemic-induced demand is gone, Adobe generating double-digit growth at a time like this is impressive. Revenue of $4.5 billion for the period ending Dec. 2 was a new record for the business.
No collection issues here
Since subscriptions account for more than 93% of total revenue, Adobe enjoys a low days sales outstanding (DSO) ratio -- this tells investors how long it takes for the business to collect on a sale.
ADBE Days Sales Outstanding (Quarterly) data by YCharts
And this isn't the case with all tech companies. Apple and Microsoft, which sell plenty of physical consumer products, have DSO multiples of 52 and 69, respectively. Adobe is a much less risky stock in that sense, as its collection cycle happens quicker, minimizing the chance that the company has incurred costs and is waiting on the related revenue to come in, or worse, having to write off an uncollectable receivable.
Why Adobe could be a strong buy for 2023
In the past, the biggest reason I wasn't overly bullish on Adobe's stock was that it was simply too expensive, trading at price-to-earnings (P/E) multiples of more than 50 or even 60. Now, at 33 times its trailing earnings, the stock is looking incredibly cheap; you have to back about a decade for the last time Adobe was trading at a lower premium.
There's some solid value here for investors and the payoff could be good if Adobe is able to get back to anywhere near its previous earnings multiples.
