Valuation analysis for Adobe Systems Incorporated (NASDAQ:ADBE)

Analysts are expecting Adobe Systems Incorporated (NASDAQ:ADBE) to have a breakout year this year, breaking out of the recent earnings malaise that the company has been going through, and then they expect stellar growth next year.

The intention of this article is to identify the fair value of Adobe given current and future earnings growth expectations.  Our identification of earnings growth focuses on trailing 12 month data compared year over year every quarter and plotted over time to define yearly growth trends.  We exclude onetime events to focus on truer growth rates while observing PE multiples and peg ratios to define value.

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According to our observations of fair value for Adobe, the company has had a negative growth rate since the fourth quarter of 2012, whose trough thus far was in the third quarter of 2013.  In the third quarter of 2013 the yearly growth rate for Adobe was -35%.  Since then the growth rate has improved and as of the most recent report the yearly earnings growth rate at Adobe was -2.27%.

ADBE EPS Growth

If analysts are right about their estimates for this coming release (Mar 17) that trend is likely to stay intact, and if analysts are right about their expectations for this year the earnings growth rate for Adobe will likely increase to 9.63%.  That is relatively attractive from a growth rate perspective.  What's even more attractive is the ongoing growth rate if analysts are also right about earnings growth in 2016.  Analysts are expecting earnings growth in 2016 of over 150% as it stands today.

At the same time, lofty PE multiples that are pushing 60 times earnings make investors scratch their heads.  Adobe looks expensive today, and it will look expensive tomorrow and at the end of the year as well if analysts are correct about their estimates, and will only get back down to a multiple in the low twenties again at the end of 2016 if analysts are correct and price remains the same.  By the end of 2015 the multiple is expected to fall to 37 times earnings if analysts are correct and price remains the same, and fall again to 23.81 times earnings by the end of 2016 assuming the same.

ADBE PE Ratio

Unfortunately, the associated peg ratios that exist for Adobe at this time are somewhat difficult to draw conclusions from given the negative values that exist and the astronomical growth that is expected in 2016, but this does leave an ongoing concern and that is the company's ability to meet estimates.  If Adobe fails to match analysts' estimates for 2015 and 2016 a company that already looks extremely expensive on a PE multiple basis will look even more expensive given what will surely be adjusted forward looking guidance.  Currently the guidance and forward estimates make the future growth look impressive, but at first glance the 150% expected growth rate for Adobe in 2016 does seem excessive.

Technical take:

According to our real time trading report for Adobe the stock is trading near its longer term resistance level and if longer term resistance remains intact we would expect the stock to fall back to test longer term support levels again by rule.  The test of longer-term resistance is also a short signal according to rule and it acts as a risk control mechanism as well, so if resistance breaks higher any shorts initiated near resistance should be closed.  Given the tests of longer-term resistance that is occurring in shares of Adobe at this time our combined technical analysis suggests extreme caution.  Currently resistance exists at $78.50 but this number will change as the stock moves and the trading channel changes so update the report regularly.

Summary:

Analysts are expecting aggressive growth and impressive growth especially in 2016, but those numbers appear exaggerated on the surface and given the recent growth trends an accelerated growth rate like that would definitely not be in line with recent trends.  Recent trends have been positive, the company has been recovering from the earnings trough it experienced in the third quarter of 2013, but not at a rate in line with what analysts are currently expecting for 2016.  That raises some eyebrows because the PE multiple of Adobe is extremely high, and if the company is not able to match estimates as they currently exist natural multiple contractions are likely.  Our technical analysis warns us that if resistance holds a decline to longer term support as that is offered in our real time trading report for Adobe is likely as well, so tread with caution.

Disclaimer: Stock Traders Daily provides trading strategies, which by definition incorporate risk controls, and it has only engaged in buy and hold strategies twice since the turn of the century. The first was in October of 2002, and those buy and hold strategies lasted until 2006, and the second was in February of 2009, and those buy and hold strategies lasted until the end of 2010. Every point in between Stock Traders Daily has been providing risk controlled strategies, market based strategies, and strategies for approximately 3000 individual stocks, which are unbiased and which incorporate the notion that short term gains lead to long term success. There is a time and a place for buy and hold strategies and this is neither the time nor the place for that approach in our opinion. Risk controls are essential.

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