Adobe Inc.(NASDAQ:ADBE) has been a consistent performer, missing a single revenue projection in the last several years.
Unsurprisingly, stock price followed that performance, becoming a six-bagger over just 4 years.
At a 53.4x P/E ratio, one could argue that the stock looks a bit pricey and requires digging below the surface to evaluate the underlying trends.
A few days ago, Adobe announced a strategic partnership with Walmart. With Adobe Commerce, Walmart’s marketplace plans to integrate online and in-store fulfillment, aiming to enhance its 2-day nationwide shipping with Adobe’s cloud services.
While the June results were just another in line with continuous positive earnings, annualized recurring revenues rose for US$518m to US$11.21b. While this is a lot, there is still room for growth as the company is taking a solid position in the fast-growing AR/VR industry. From that perspective, Adobe is a strong thematic investing candidate.
Interestingly, an established SaaS player is a good hedge against potential inflation. With an established user base and billions in recurring revenues, Adobe has been successful in slowly rising subscription prices without damaging the market share.
Want the complete picture of analyst estimates for the company? Then our free report on Adobe will help you uncover what's on the horizon.
Does Growth Match The High P/E?
The only time you'd be genuinely comfortable seeing a P/E as steep as Adobe is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 52% last year. EPS has also lifted 165% in aggregate from three years ago, thanks to the previous 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the company analysts suggest earnings should grow by 6.6% each year over the next three years. The company is positioned for a weaker earnings result, with the market predicted to deliver 13% growth per annum.
In light of this, it's alarming that Adobe's P/E sits above most other companies. Many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
It's argued the price-to-earnings ratio is an inferior measure of value within specific industries, but it can be a powerful business sentiment indicator.
Our examination of Adobe's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now, we are increasingly uncomfortable with the high P/E as the expected future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It's always necessary to consider the ever-present specter of investment risk. We've identified 1 warning sign with Adobe, and understanding should be part of your investment process.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.
Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.