Shares of Adobe Systems Incorporated (ADBE) reached an all-time high in March 2017, climbing above $130 in the wake of a strong earnings report. That saw the stock up more than 25% year to date, outpacing the NASDAQ by 15 percentage points. Fundamentals were the primary driver of the recent shifts, although bullish valuations based on long-term outlook are also an important element.
Adobe reported a 42% year-over-year increase in earnings for the first quarter of fiscal 2017, topping analyst estimates. In addition, revenue increased 22% for the period. The company set records for sales, earnings and cash flow during the quarter. While the shift to cloud deployment has cast a shadow of uncertainty over much of the software industry, it has become clear that Adobe has handled the transition expertly and embraced the new standard of delivery. Management provided an optimistic outlook based on business fundamentals, forecasting 32% earnings per share growth and top-line expansion of 22%. This combination of results and outlook compounded the bullishness already surrounding the name. (See also: Adobe Beats Earnings and Revenue Estimates in Q1.)
Appreciation of this magnitude at Adobe's maturity and size certainly warrants some scrutiny. This is doubly true given Adobe's cyclical history, because the failure to recognize cyclical effects can have a drastic impact on valuation.
The stock cannot be considered cheap by most standards, but it compares favorably to peers and looks reasonable on a growth-adjusted basis. Adobe stock trades in line with peers on price-to-book and enterprise-value-to-EBITDA multiples. Trailing price-to-earnings is less attractive at a noteworthy 48.3, but forward P/E is substantially below most peers at 25.4, and Adobe leads the group with an enticing PEG ratio of 0.81. Price-to-free-cash-flow of 27.9 does not scream "must buy" in a vacuum, but it is far superior to the peer average. (See also: The Industry Handbook: Software Industry.)
Adobe also falls within its historical range on both EV/EBITDA and trailing P/E, although it is expensive relative to tangible book value. While Adobe's share prices are pushing into uncharted territory, exceptional fundamental growth has ensured that this is not merely speculation.
Operationally, Adobe's growth is its primary strength relative to peers. The company is expected to be one of the leaders for both revenue and earnings expansion among large-cap software companies in the coming years. Adobe also has a strong margin profile, with gross margin climbing back up to 86% last year. The company's 20% net margin places it near the top of the peer group. Adobe's efficiency scores are less impressive, with below average asset turnover. Return on equity also lags the group average because the company's capital structure employs lower financial leverage than peers. Adobe has a strong balance sheet and adequate financial strength. (See also: Adobe Is Digital Growth and a Top Tech Stock.)
After a strong run of returns, Adobe stock cannot be considered exceptionally cheap for long-term value investors, especially in relation to stocks from other sectors. However, there are multiple metrics suggesting that its pricing can be acceptable for tech investors who are bullish on the company's long-term operational prospects. Adobe is especially enticing when controlling for medium-term growth outlook and cash flows. Analyst opinion on the stock is high, with 18 of 26 analysts recommending a buy or strong buy, according to Yahoo Finance.
Adobe stock is worthy of consideration for investors who are seeking a tech name with significant growth potential, short-term stability, positive cash flows and an acclaimed product offering. That said, there are probably less speculative names for risk-averse investors who are sector agnostic. (See also: Microsoft Collaborates With Adobe to Gain CRM Dominance.)