Like many other software stocks, Adobe (ADBE 0.19%) has seen turbulent trading over the last year. The company's share price has fallen roughly 45% over the last 12 months, and it's off 48% from its high.
Should investors treat the big valuation pullback as an opportunity to buy the stock, or is this a case where there's still too much downside risk? Read on to see why two Motley Fool contributors come down on opposite sides of the bull versus bear debate on Adobe stock.
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A category leader with appealing long-term potential
Keith Noonan: Market aversion to growth stocks and the specter of ongoing macroeconomic pressures have led investors to sell out of Adobe stock. However, I believe shares are attractively valued for long-term investors at current prices.
The company is providing best-in-class software offerings that are industry standards for many creative-oriented projects, and products including Photoshop, Premiere Pro, and After Effects should continue to enjoy strong demand for many years to come. And with its analytics, customer management, and advertising applications, the software specialist is providing a comprehensive set of tools for media professionals.
Even as the company's growth rates are slowing, Adobe continues to post fantastic margins and has an appealing long-term expansion outlook.
With $17.61 billion in sales for its recently concluded fiscal year, which ended Dec. 2, Adobe served up $6.1 billion in operating income -- good for a roughly 34.6% operating margin. The company also recorded $4.76 billion in GAAP net income and $6.46 billion in non-GAAP (adjusted) net income -- good for margins of 27% and 36.7%, respectively. Backed by a strong, highly scalable software suite, this is already a highly profitable business.
Trading at roughly 22 times expected forward earnings, Adobe's valuation remains growth dependent, but its price-to-earnings multiples sit at nonprohibitive levels for long-term investors. The business is a cash-generating machine that's built for longevity. The quality and embedded nature of its software products, as well as considerable brand strength, give Adobe a strong moat -- and I expect that the stock will deliver strong returns for investors who take a buy-and-hold approach.
Adobe's profit growth is slowing
Parkev Tatevosian: Before I make my bear case for Adobe stock, I would like to say I think the stock is a good value right now. Still, investors need to know the bear case, especially for stocks they want to buy. That said, my hesitation before buying Adobe stock centers on slowing earnings growth.
In 2020, Adobe generated earnings per share of $10.83. In 2021 that figure fell to $10.02. And in 2022, it rebounded to $10.10. Thankfully, management expects EPS to increase to $10.90 at the midpoint. If it achieves this target, it would be a welcome sign for investors, but with rising interest rates, a war in Ukraine, and inflation pinching consumer and enterprise budgets, that remains to be seen.
Adobe's creative software is admittedly one of the best in the industry. The trouble is that it's not easy to learn, leaving entry-level customers looking to competitors. While these competitors are not much of a threat to take Adobe's more experienced users, they could slow its customer acquisition.
This could explain why Adobe paid a whopping $20 billion to acquire Figma, a company that helps make the user experience smoother. The Figma purchase is estimated to add $400 million to Adobe's revenue, so it essentially paid 50 times sales to acquire the company.
Adobe's an excellent business that has grown its top and bottom line by more than double digits in the last decade, but there is cause for investors to hesitate before buying the stock right now.
Should investors buy Adobe stock today?
Adobe is a strong company, but there are still risk factors that could lead to continued turbulence for the stock. For more risk-averse investors, the company may not be a great portfolio fit, even though there's a lot to like about the business.
On the other hand, the company is already posting impressive profits despite slowing earnings growth, and Adobe is positioned to facilitate and benefit from the growth of the media industry at large. Valuations for software stocks have come under pressure lately, but the tough times won't last forever, and Adobe is a name that could deliver market-crushing returns for long-term investors.
