There are many good reasons for investors to be attracted to Adobe's (ADBE 1.49%) business right now. Few other software specialists can claim anything approaching its market dominance in key niches like digital content creation and management, after all. And its software-as-a-service approach delivers a high proportion of recurring revenue and makes for a highly profitable, cash-rich business.
No business is immune to competitive and economic pressures, though. And Adobe's stock has rallied to a premium that might seem too high for some investors. With those big-picture factors in mind, let's look at whether the stock is a buy right now.
Adobe has good growth trends
Adobe gave investors many reasons to celebrate its most recent earnings report. Sales trends beat expectations in the period that ran through early June, with revenue rising 13% after accounting for currency exchange-rate swings. The software specialist is seeing a substantial boost in productivity and demand from generative artificial intelligence (AI) and from the larger trend of the digitization of work.
NASDAQ: ADBE
Key Data Points
Growth rates were strong enough to convince management in mid-July to hike their 2023 outlook on both the top and bottom lines. These factors have played a big role in the stock's rally in 2023, which has pushed shares up roughly 60% so far this year.
Financial successes
There are two major financial trends supporting the stock's rise, too. The first is Adobe's stabilizing profit trends. After sinking for about a year, operating profit margin is stabilizing at over 30% of sales.
Success here has allowed Adobe to direct more resources toward high-return innovation, particularly AI functionality. Yet that surging research and development (R&D) spending isn't seriously hurting profits. Adobe has generated $3.2 billion of operating income through the first half of 2023, up from $3.1 billion a year earlier.
Cash-flow trends are similarly strong, as you might expect from a company that gets most of its sales through recurring payments. Operating cash flow was $2.1 billion last quarter on just $4.8 billion of total revenue.
The price you pay
As you might expect, investors are being asked to pay a high premium for all that success. Adobe stock is valued at 14 times sales right now, up from about 10 times sales in early 2023. Microsoft, for context, is valued at 12 times sales and is more profitable right now.
Given that context, it's possible that Adobe's valuation has been temporarily inflated by unreasonably high expectations for the impact of AI. Investors could be disappointed over the next few quarters if these innovations don't spark higher sales to go with the perceived value increase for products like Photoshop and the Creative Cloud. As a result, cautious investors might want to simply watch this rallying stock for now.
On the other hand, Adobe stock is still trading below the all-time highs it reached in late 2021, and its growth and profit trends are currently on the upswing. For growth-focused investors, then, this software business represents a great way to gain exposure to several attractive tech niches that could expand for many years to come. If you're in that camp, consider starting at least a small position in Adobe stock right now.
