Avoid Adobe For Now After Its 226,515.2% Stock Rise
Over the last couple months, I’ve shown you stocks to avoid…
Stocks to consider buying…
And some of the best stocks related to the coming Internet of Things… Which you can find linked further below.
All these recommendations are to help you either avoid pain and terrible stocks. Or to help you find potentially great stocks to invest in during this pandemic.
If you do both well, it helps you earn higher than average investment returns and build wealth.
Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.
Today, I want to help you figure this out by telling you why to Avoid Adobe For Now After Its 226,515.2% Stock Rise.
Adobe (ADBE) is one of the world’s largest software companies.
It offers products and services we use every day like Photoshop, Adobe Acrobat – for reading PDF’s, and many others.
Before it used to charge high one time or annual fees for its products and service. But with a recent transition to more of a SaaS – software as a service – business model it now charges smaller monthly fees for its products and services.
And its helped skyrocket the company.
Since it IPO’d on August 20th, 1986 its stock is up 226,515.2%. That’s not a typo.
And in the last 10 years alone as it began making this major transition to its business model its stock is up 1,260.4%.
Its grown so much and become such a business behemoth that its now the 29th largest company in the world with a $222.9 billion market cap.
But this is in the past and it doesn’t help us figure out if it’s a great buy now…
That’s what I want to help you figure out today.
It’s based in San Jose California. It has a $222.9 billion market cap. And it earns enormous profits and cash flows.
Adobe Earns Large Profits
Over the last decade it earned an average operating income margin of 24.4% per year.
I look for anything above 10% on a consistent basis so this is great. But it gets even better which I’ll detail below.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 32.8% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.
These metrics are both already far above what I require from an investment… And they’re so consistently great that they make Adobe one of the best run companies on Earth.
But frankly these are underestimates due to the switch in business model earlier in the decade that I mentioned above.
From 2016 – about when this transition finished – to today in early 2021 these margins are even bigger.
Its operating margin averaged 29.8% in these 5 years.
And its FCF/Sales margin averaged 38.1%.
Again, this doesn’t just mean Adobe is a great operating business… Its one of the best run companies on Earth. And this adds a huge margin of safety to potentially buying its stock.
Another benefit of these high margins is they allow Adobe to have low debt levels.
Adobe Has Low Debt
As of this writing ADBE has $5.99 billion in cash compared to $4.71 billion in debt.
As a percentage of its balance sheet total liabilities make up only 45.4%.
Debt makes up 2.1% of its market cap.
And its debt-to-equity ratio is 0.34.
These all fall well below the minimum thresholds I look for… As one example, I look for debt to equity ratios to be below 1.
This low debt adds another large margin of safety to potentially owning its stock. Adobe looks like a great potential stock to buy… But what about its valuation? Is it cheap enough to buy?
Adobe IS NOT Cheap…
With the markets at or near all-time highs you’d expect a fantastic stock like Adobe to be selling at an enormous valuation.
Unfortunately, it is.
As of this writing its P/E is 46.2.
Its P/CF is 36.8.
Its forward P/E is 40.5.
And its enterprise value to operating income – EV/EBIT is 46.8.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
These metrics combined show that Adobe is massively overvalued right now.
And this means owning its stock does not give you a large margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Adobe being massively overvalued right now, its stock does not give you a large margin of safety… Even when you consider all the other great things above.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in Adobe… But only when its cheaper.
And consider one of the other investments below in the meantime.
But before you do that, I need to let you know something else… On April 5th we’re revamping this newsletter to better serve you.
You’ll now have more analysis and commentary coming your way regularly… In an easier to read format… All so we can help you protect your wealth during these uncertain times.
Make sure to check your email on April 5th to see how we plan to help you even more.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.