Since Adobe (NASDAQ:ADBE) moved its applications to clouds and began selling them as a service early this decade, Adobe stock has been a rocket ship with seemingly unlimited fuel.
Over the last five years alone it has risen 326%. If you bought it 10 years ago, near the bottom of the recession, your gains have been 819%. By comparison, Microsoft (NASDAQ:MSFT), whose Azure cloud hosts Adobe applications, is up “only” 480%.
This is possible because of the economics of cloud, built on open source software and commodity hardware. The biggest benefits of open source go to the users, not the developers, and Adobe is a cloud user.
Adobe Stock Valuation Concerns
With an opening July 3 price of $302, and a market cap of $146.3 billion, Adobe shares are in nosebleed territory. It’s a place they’ve been before this decade, consolidating and then rushing higher on results.
The latest results, delivered June 18, were once again above analyst expectations, with year over year growth of 25%. Adobe earned $632 million, $1.29 per share fully diluted, on revenue of $2.744 billion. Earnings beat elevated estimates by almost 3%.
Shares rose 4.6% after the earnings beat and have kept rising since. Adobe now trades at a whopping 16 times last year’s sales and 56 times last year’s earnings.
The time to be bullish, some say, is over. The marketing-based Experience Cloud carries lower margins than the Creative Cloud, which includes such products as Illustrator, Acrobat and Photoshop, the bears grumble, and it’s growing fastest.
Sweet Smell of Success
Meanwhile, Adobe has broken ground on a second office tower in downtown San Jose, where it has long dominated the skyline. The new tower will serve 4,000 people, with 700,000 square feet on 18 floors. For San Jose, technically the Bay Area’s largest city but long seen as a sleepy suburb until landing the new San Francisco 49’ers stadium, it’s a very big deal.
Adobe continues to break new ground on its software products, the latest innovation being a tool that can tell when the Face Liquify feature of its Photoshop has been used to enhance someone’s face. As more-and-more fake photos and videos are released such security tools are becoming important. Spotting fakes provides a rich vein of future growth. Adobe has also released enhancements that let users erase background objects, so the definition of fake keeps shifting.
For that reason, and Adobe’s stellar track record this decade, there remain Adobe bulls. Adobe is a disrupter, they say, and that’s where you want to be in the current market. Analysts who pounded the table for the stock before earnings looked prescient when the numbers came out. As more marketers in more places gain the scale to afford subscriptions, they see it as wise to let their bets on Adobe ride.
The Bottom Line on Adobe Stock
The cloud decade shows no immediate signs of ending. But it does show signs of maturing.
Whether Adobe can lead in the next phase of technology, as artificial intelligence mediated by cloud gets into devices you see every day, is uncertain. But the company has the scale and the talent to keep moving forward.
Until the ground truly shifts under Adobe’s feet, I’d let my investment here ride. But for a young investor looking for the returns Adobe has delivered over the last 10 years, it’s time to look elsewhere.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.