Adobe Inc. (NASDAQ:ADBE) May Be Fully Valued but Analyst Estimates Are Trending Higher

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Richard Bowman

Mon, Jul 12, 2021, 8:36 PM 4 min read

The share price of Adobe Inc. ( NASDAQ:ADBE ) rose 23% in the second quarter, making it the second best performing large cap tech stock. The strong price performance was supported by a very good set of second quarter results which were released in June . Adobe reported revenue of $3.84 billion for the quarter, up 23% from a year ago and $110 million ahead of consensus estimates.

Adobe's largest business segment, Digital Media, increased revenue by 25% to $2.79 billion. The Digital Experience segment grew revenue 21% to $938 million. When the largest segment is growing at a higher rate than total revenue, top line revenue growth accelerates for the company.

Adjusted net income was also up 23% to $1.46 billion. EPS of $3.03 were well ahead of consensus estimates of $2.82. The company's management team also raised guidance for the third quarter to sales of $3.88 billion and EPS of $3.

After such a strong move it’s worth looking at the company’s valuation.

See our latest analysis for Adobe

What is Adobe worth?

Our valuation model, which is based on analyst estimates for Adobe’s future earnings, suggests the fair value is around $511.86. This implies that the stock is trading at a modest premium to its intrinsic value.

Obviously, the implied fair value would change if analyst estimates change, so we should take a closer look at forecast growth rates for revenue and earnings. The chart below illustrates what analyst forecasts for Adobe’s revenue, earnings and cash flows look like.

Can we expect growth from Adobe?

NasdaqGS:ADBE Earnings and Revenue Growth July 5th 2021

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations.

In Adobe’s case we can see that revenue is forecast to grow at 22% during the current period, and then slow to 14.5 to 15% in the next two years. Earnings are forecast to fall slightly later this year and then rise 14.5% and 18% in the next two years. It’s worth noting that 23 analysts have raised their estimates for full year earnings in the last 90 days, while there have been no downward revisions.

It's also notable that Adobe’s earnings have grown at 54% over the last 5 years, so current forecasts imply a significant slowdown, while results have typically been stronger than expected - Adobe has beaten estimates in 11 of the last 12 quarters.

What this means for you:

As things stand, Adobe's share price has caught up with the valuation implied by analyst forecasts. However, estimates do change, and they have been raised several times this year already. Adobe is now generating profits of over $5 billion a year and has still managed to grow those profits at a very impressive rate. In this type of situation analysts are often reluctant to extrapolate growth into the future, and rather err on the side of caution. But this means estimates may be raised each quarter if the company keeps beating consensus estimates.

That said, the stock appears to be fully valued based on current forecasts, which means there isn't a margin of safety in the event that estimates do not rise. Buying a stock when it is trading at a discount to fair value offers more potential upside, and a margin of safety if estimates don't rise. Like all companies, Adobe does face certain risks and we have identified at least 1 warning sign for Adobe you should be aware of.

If you are no longer interested in Adobe, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.
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