Adobe trades at $276.06 per share and has stayed right on track with the overall market, gaining 7.1% over the last six months. At the same time, the S&P 500 has returned 10.5%.
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Why Is Adobe Not Exciting?
We’re passing on Adobe for now. Here are three reasons we avoid ADBE, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Adobe’s billings came in at $6.50 billion in Q2, and over the last four quarters, its year-on-year growth averaged 12.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Adobe’s revenue to rise by 9.8%, close to its 11.9% annualized growth for the past five years. This projection doesn’t excite us and implies its newer products and services will not catalyze better top-line performance yet.
3. Operating Margin in Limbo
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Adobe’s operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 36.1%.
Final Judgment
Adobe’s business quality ultimately falls short of our standards. That said, the stock currently trades at 4× forward price-to-sales (or $276.06 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re fairly confident there are better investments elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
Stocks We Like More Than Adobe
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