Founded by John Warnock and Charles Geshke in December of 1982, Adobe Inc. (NASDAQ: ADBE) was formerly known for years as Adobe Systems. After leaving Xerox PARC to develop and sell PostScript page description language, the pair established the company to create new and improved ways to print text and images.
PostScript software allows a computer file to be printed in the exact form it appears on a computer screen. The stock went public on August 20, 1986. Numerous acquisitions over the years have helped the company to grow and increase its product line. Reports cited the acquisition of Omniture as a valuable addition, giving the company a new set of tools for its various products.
Over the years since going public, the company has grown into a massive software giant, and many professionals are faithful users of Adobe Creative Suite. We looked at the company and found five reasons investors looking to buy shares now should tap the brakes some.
Adobe stock is expensive
The shares are priced for perfection when trading at 50.52 times trailing earnings. While earnings are expected to grow in 2024, that doesn’t justify a multiple that big.
The forward multiple is still pricey
While earnings are expected to jump to $20.36 per share next year (the average estimate on Yahoo Finance for fiscal 2025), the shares are still trading at 30 times forward earnings expectations.
The stock exploded higher over the last ten months
From a 52-week low of $318.60 in March of 2023 to the high of $633.89, which the stock hit in mid-December, shares are trading just below the $600 level. With the one-year median target estimate of $648.57, that is only an 8.7% move higher. The logic should be to most investors that the big money has been made.
If the stock market crashes, Adobe may get crushed
With the stock market trading at or near all-time highs, intelligent investors and Wall Street pundits feel we could have a severe correction coming our way in 2025. After the vast run higher in share price for Adobe over the last ten months, and the largest shareholders being big institutions (who own 83.55%) like Vanguard, Blackrock, and State Street, among others, you can bet they will be anxious to take those massive profits if a significant correction did occur.
The core business continues to grow, but guidance was disappointing
While revenues rose 13% in fiscal 2023 in constant currency terms and 10% on a reported basis, for fiscal 2024, the company is only expecting revenue to increase 10%-11%, which compares with expectations of 12%.
Reports indicate that over 400 billion PDFs were opened, and 16 billion documents were edited in Adobe Acrobat last year. In addition, more than 8 billion electronic and digital signatures were processed through Adobe’s Document Cloud. So clearly, the company’s growth prospects remain very bullish. After the vast run higher in share price over the last ten months and the market overbought and thoroughly valued, investors should wait for a pullback in the stock.
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