There are two sides to every stock trade, implying conviction on the part of both the buyer and the seller. The parties might simply disagree on timing rather than on the wider bullish growth thesis, with the seller seeking to raise immediate cash. But in many cases, there are fundamental disagreements about the prospects for a stock's returns.
Adobe (ADBE 1.81%) stock fits in that controversial category. Shares underperformed the wider market last year but have trounced the S&P 500 so far in 2023. Let's take a closer look at the pillars of both the bullish and bearish thesis for this popular tech stock.
Bears see better options
Bears won't argue that Adobe is a weak business, given its prime position in growing tech niches like digital-content creation. Instead, they'll point out that the stock's valuation doesn't make a lot of sense.
The software specialist isn't putting up especially strong growth figures right now, for example. Sales rose just 13% in the most recent quarter. Cybersecurity specialist Palo Alto Networks, for context, expanded sales at a 24% rate this past quarter and is valued at a discount, compared to Adobe.
There are also more attractive software stocks available when judging by profitability. Microsoft trounces Adobe in the profit department, as its operating margin is over 40% of sales and rising today. Adobe's comparable figure is 34% and has been declining over the past few quarters.
In that context, it seems likely that Adobe's recent stock price rally has gotten ahead of itself, potentially limiting returns for investors who buy the stock right now.
Bulls see opportunities
Bulls believe Adobe is well worth the premium. Sure, its sales growth is underwhelming. But its software-as-a-service business generates tons of cash. Operating cash flow was $2.1 billion this past quarter, translating to over 40% of sales. Adobe is also sitting on nearly $7 billion today that management can direct toward growth initiatives and direct returns to shareholders.
The future also looks bright for the company's main growth niches. Content creation, digitization, and management is a booming industry that's likely to expand for many years as enterprises continue their shift toward cloud-based operations.
Adobe is positioned to benefit from productivity gains from artificial intelligence (AI) innovations, too. Successes in these areas recently convinced management to raise its fiscal 2023 outlook, and bulls are expecting many more upgrades over the years to come.
The right fit
Where you land on this argument will depend on your patience and risk tolerance. Cautious investors will want to simply watch this stock, as its high valuation and relatively slow growth could bring a cheaper price if the company stumbles in an upcoming earnings report or the market turns lower.
On the other hand, growth-focused investors might happily pay a premium for Adobe stock right now. Few companies approach their market-share dominance over such large industry niches, after all.
Adobe's financial strength is impressive, too, and there's a good chance that sales trends will remain high for many years. If you can hold the stock through some volatility, then, it makes sense to side with the bulls on this question.
