Adobe Stock Is Believed To Be Modestly Overvalued
- By GF Value
The stock of Adobe (NAS:ADBE, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $504.5 per share and the market cap of $241.2 billion, Adobe stock gives every indication of being modestly overvalued. GF Value for Adobe is shown in the chart below.
Because Adobe is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 22.1% over the past three years and is estimated to grow 16.42% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Adobe has a cash-to-debt ratio of 1.05, which which ranks worse than 68% of the companies in Software industry. The overall financial strength of Adobe is 7 out of 10, which indicates that the financial strength of Adobe is fair. This is the debt and cash of Adobe over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Adobe has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $13.7 billion and earnings of $11.49 a share. Its operating margin of 34.75% better than 96% of the companies in Software industry. Overall, GuruFocus ranks Adobe's profitability as strong. This is the revenue and net income of Adobe over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Adobe is 22.1%, which ranks better than 83% of the companies in Software industry. The 3-year average EBITDA growth rate is 27.1%, which ranks better than 72% of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Adobe's ROIC was 28.54, while its WACC came in at 7.48. The historical ROIC vs WACC comparison of Adobe is shown below:
To conclude, the stock of Adobe (NAS:ADBE, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 72% of the companies in Software industry. To learn more about Adobe stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
