Key Takeaways:
- The 2-Minute Valuation Model values Adobe stock at $500/share in 2 years.
- That’s a potential 43% upside from today’s price of around $349/share.
- Apple is trading at a historically low multiple but is still expected to see double-digit annual earnings growth.
- Get accurate financial data on over 100,000 global stocks for free on TIKR >>>
Adobe (ADBE) is down 20% in the past year due to increasing software competition, market saturation, and overall economic uncertainty.
Additionally, investors might be concerned that software investing is undergoing structural changes.
AI is dramatically reducing the costs to create software, which will make it easier for new entrants to enter markets and erode the excellent competitive advantages that leading software companies have enjoyed for years.
Still, Adobe looks cheap today.
I’d argue that investors should remember that Adobe saw 40% returns on capital last year with nearly 90% gross margins. The company is a long-term winner, which is why the stock has averaged 17% annual returns over the past 10 years.
I think it’s a bit early to count high-performing software companies like Adobe out.
Additionally, it looks like the stock today could have over 40% upside today, based on analysts’ earnings estimates.
Adobe could be a good opportunity for those who still believe in excellent software companies.
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What is the 2-Minute Valuation Model?
Three core factors drive a stock’s long-term value:
- Revenue Growth: How big the business becomes.
- Margins: How much the business earns in profit.
- Multiple: How much investors are willing to pay for a business’s earnings.
Our 2-Minute Valuation Model uses a simple formula to value stocks:
Expected Normalized EPS * Forward P/E ratio = Expected Share Price
Revenue growth and margins drive a company’s long-term normalized earnings per share (EPS), and investors can use a stock’s long-term average P/E multiple to get an idea of how the market values a company.
Why Adobe Looks Undervalued
Forecast
Adobe is projected to increase normalized earnings per share by nearly 12% annually over the next 3 years.
Analysts estimate that Adobe’s earnings-per-share will reach $25.63 in 2028, so in our valuation, we’ll estimate that the stock will reach $25 in EPS in 2028.
This earnings growth is likely to be driven by:
- Expansion in the Creative Cloud: Continued development and integration of AI capabilities in creative software, enhancing user experience and expanding customer base.
- Growth in Adobe Experience Cloud: Strong adoption of digital experience solutions by businesses aiming to enhance customer engagement and personalization.
- Strategic Acquisitions: Recent acquisitions that enhance Adobe’s product offerings and geographic presence, contributing to revenue diversification.
View Adobe’s full analyst estimates >>>
Valuation Multiple
Adobe has traded at an average forward P/E multiple of about 33x over the past 5 years, as shown in the historical P/E chart.
Today, the stock is trading at its lowest P/E ratio in the past 5 years at about 17.6 times forward earnings.
The stock looks cheap:
We’ll use a conservative forward P/E multiple of 20 in our valuation. Given that earnings are expected to grow at 12% annually, this is a pretty reasonable P/E ratio.
Fair Value
Using our 2-Minute Valuation Model and applying a conservative approach:
- Conservative 2028 EPS estimate: $25
- Conservative forward P/E multiple: 20x
Expected Normalized EPS ($25) * Forward P/E ratio (20x) = Expected Share Price ($500)
The 2-year expected share price we would get from this valuation is $500/share.
This presents a pretty nice potential upside since the stock today trades at around $349/share.
The stock could have a 43% potential upside over the next 2 years, which would be nearly 20% annualized return:
Keep in mind, this is just a valuation exercise, and we don’t know for sure what the stock’s price will be in the future.
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Analysts’ Price Target
Today, analysts have an average price target of about $519/share for Adobe stock today, which means they see over 40% upside for the stock today as well.
This means that analysts think the stock is undervalued today:
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Risks to Consider
While our valuation and analysts’ price targets suggest that Adobe is undervalued, investors should be aware of several risks:
- Market Competition: Intense competition in the software industry, particularly from other cloud-based service providers.
- Technological Changes: Rapid technological advancements could render some of Adobe’s products obsolete if not continuously innovated.
- Global Economic Conditions: Macroeconomic factors that could influence spending on software and subscription services.
TIKR Takeaway
Adobe looks like an attractive investment opportunity today with its strong market position in creative and marketing software.
The stock could deliver 20% annualized returns over the next 2 years due to the company’s double-digit annual projected earnings growth.
Is Adobe a buy over the next 24 months? Use TIKR to check the stock’s 5-year growth forecasts and other financial metrics to see if the tech stock looks undervalued today.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
