A wait and see method is best for ADBE stocks

<p>Following the recent market sale, are Adobe (NASDAQ: ADBE) stocks a good “buy dip” situation? It depends on. On the one hand, the software giant has a deep economic moat. With its Document Cloud and Creative Cloud solutions, the company has significant market power. On the other hand, investors know this well. They have priced this to equities, which continue to trade at a rich valuation.

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Adobe may be an established company. But with its strong growth path, it is far from a mature company. With this in mind, a premium valuation is probably justified. But depending on your time horizon, stocks may or may not be a buy at today’s prices.

In the short term, don’t expect to see a big step higher than in 2019. Last year, stocks rose nearly 50%, rising from around $ 220 per share to $ 329.81 per share. With ground sawing, ADBE stocks can at best tread water this year. If the markets recover, the shares can appreciate. But do not expect another 50% move.

Do not understand, sell Adobe shares, pronto! Far from. Valuation can be rich, but the company’s growth opportunities are in place. Let’s dive in and see why waiting for stocks to fall may be the best step.

The runway is ready for ADBE bearings

With stocks up to nine times in the last decade, are there additional tracks for Adobe stock? Signs indicate yes. As InvestorPlace’s own Louis Navellier and InvestorPlace Research Staff discussed on February 27, the company is not one to rest on its laurels. In other words, they could have easily milked PDF and Photoshop for cash flow and circled it with new versions of the software.

Instead, they charge forward and turn to cloud-based SaaS (Software-as-a-Service) solutions. As with Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT), Adobe is another opportunity for investors to ride the cloud and the SaaS wave.

With this in mind, it is entirely reasonable that the company continues to deliver strong sales growth. This is good for ADBE shares. Such continued growth helps to support its rich valuation. Still, the simple money may have already been made. Like the impressive rally in Microsoft equities over the past year, the investment community has likely priced in the cloud catalyst.

What does this mean for investors looking at Adobe stocks today? The shares may climb higher over the next 12 months. Just not as much as in recent years. Add the risk of a devaluation, and investors should consider before entering the stock at current prices.

Will the valuation be extended or contracted?

With a high market share and macro factors to its advantage, it is tempting to consider “buying dip” with Adobe shares. And why not? Even on the latest market sales, hot SaaS and cloud stocks have not been exactly cratered. They have simply given up quick profits from the now rampant bull market.

It remains to be seen whether the correction in 2020 will be similar to that in 2018. If so, it makes perfect sense that the ADBE share can return to its 52-week highest value ($ 386.75). Maybe it can go even higher, to $ 400 per share price level and beyond.

On the other hand, what happens if we enter a bear market? Shares can give back more of their short-term gains and fall below $ 300 per share again. This is possible given the risk of valuation. The ADBE share is currently traded at a forward price (PE) of 31.2. In comparison, Microsoft trades at 26.5 times futures revenue.

Assuming Adobe meets the 2019 fiscal year (ending November 2019), estimates of earnings of $ 9.81 per share, if the valuation decreased by Microsoft’s multiple, the share would fall to approximately $ 260 per share. In other words, it is a potential decline of about 15% from the stock‘s $ 305.79 near March 9.

Then Adobe’s upcoming revenue may surprise. The company’s guidance has required that revenue growth fall below 20%. But if the company shatters estimates and shows that previous growth levels remain sustainable, the fear of devaluation can go out the window.

Do not expect large movements at any time

The conclusion of the ADBE share: the underlying business is strong but shares are traded at a frothy valuation. The company’s growth prospects partly justify its high multiple. However, if markets continue to develop lower, expect multiples to decrease, not expand, in the short term.

The Adobe stock analyst thinks of this Warren Buffett quote: “It’s much better to buy a wonderful company at a reasonable price than a fair company at a great price.”

There is no doubt that Adobe is a “wonderful company”. But do stocks trade at a “fair price?” It’s up for debate. If future results show growth, the shares may fall to a more reasonable valuation. Given this factor, a wait-and-see strategy may be the best step.

Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.

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