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QuestionsCategory: Investor PsychologyAdobe: 30+% decline YTD. Is this a value-growth stock or is “slowing growth” a concern?
Justin O asked 4 weeks ago

Hi,
I am seeking some collective wisdom.
Adobe is currently down 30+ % since Dec. 
Be it from a (last 10 years) cash flow or (last 5 years) earnings perspective, it all points to the stock being undervalued.
There has been insider selling but it looks like the disposal of exercised options granted to its executives and directors.
From the news, there seem to be two main points:

  1. Poor revenue guidance due to Russia-Ukraine war
  2. “Slowing growth” in part due to concerns that Adobe might be facing headwinds now from competitors like Canva

So my questions are:
a. Should we be concerned about the impact of the Russia-Ukraine war? My simple view is that an 85m rev decline guidance seems like a lot but it is less than 1% of Adobe’s income
b. Is Adobe truly going through “slowing growth”? Granted that it does not have the 30-50% subscription rev growth from 6/7 years ago, but it was still commanding at least 20% growth YOY in the last 5 years. Isn’t 20% still considered high? Is there any information that I might have missed that would justify this statement of “slowing growth”?
c. Lastly, how would a P/E or P/CFO valuation methodology be adjusted, assuming condition B is true?

Jieren Zheng replied 4 weeks ago

I think for any company facing slower growth, valuations will be rerated down to match the perceived growth rates. So probably guess at least the short term, that’s how the market is feeling.

Victor Chng replied 3 weeks ago

Thanks JR

2 Answers
Victor Chng answered 3 weeks ago

Hi Justin,
 

  1. As you had mentioned, it is less than 1% of Adobe’s income, hence I don’t think you have have any concern about it. 

  2. The market like to overreact to things when it does not hit their expectation. Personally, I feel that 20% is a good growth. Like what JR had mentioned, Adobe have been trading at a much higher PE, hence due to growth decreasing to 20%, the PE is being re-rated.

  3. There is no need for any adjustment. You just have to look at the valuation and pay at a lower standard deviation. The average PE (5Y) of Adobe is roughly 52x. The current price should be trading at around 40x which is 2SD. If you want more buffer then wait for 3SD.

 

Victor Chng answered 3 weeks ago

Hi Justin,
 

  1. As you had mentioned, it is less than 1% of Adobe’s income, hence I don’t think you have have any concern about it. 

  2. The market like to overreact to things when it does not hit their expectation. Personally, I feel that 20% is a good growth. Like what JR had mentioned, Adobe have been trading at a much higher PE, hence due to growth decreasing to 20%, the PE is being re-rated.

  3. There is no need for any adjustment. You just have to look at the valuation and pay at a lower standard deviation. The average PE (5Y) of Adobe is roughly 52x. The current price should be trading at around 40x which is 2SD. If you want more buffer then wait for 3SD.