Adobe Stock Looks Like a Buy Before Its Earnings Release

With a YTD gain of over 47 percent, Adobe is among the top 50 gainers in the S&P 500 this year. The company is scheduled to release its earnings on Dec. 9. Is Adobe stock a buy before its fourth-quarter earnings release?

Adobe stock has risen this year amid the rally in U.S. tech shares. However, the rally has cooled down a bit. Investors have looked at cyclical stocks and bet on a recovery in 2021. Adobe stock has also lost almost 19 percent from its 52-week highs.

On Stocktwits, username RipShowStocks expects strong numbers from Adobe in its upcoming earnings. He also points out that Adobe stock closed above key moving averages last week.

Adobe stock closed above its 14-day SMA (simple moving average), 20-day SMA, and 50-day SMA last week. A stock crossing above its short-term moving averages is a sign of a short-term uptrend. 

According to the estimates compiled by CNN Business, Adobe's median target price of $560 is a premium of 15.2 percent over the current prices. The stock’s highest target price of $600 is 23.5 percent above its current prices, while the lowest target price of $450 represents a 7.4 percent downside over the current price levels.

Adobe stock trades at an NTM PE ratio of 45x, which is higher than its historic multiples. However, the valuation premium should be seen in light of rerating U.S. tech shares. Markets have repriced them and expect the pace of digitization to increase.

So far, Adobe has split its stock five times. The first stock split was in 1988, while the most recent one was in 2005. Fundamentally, stock splits don’t have any impact on the stock’s valuation, but they lead to higher liquidity. Many companies, including Apple and Tesla, have split their shares this year, which triggered a buying spree in their stocks. Adobe stock is near the $500 price level and the company might consider a stock split to increase the liquidity.

Adobe’s revenues have increased above 20 percent every year consistently for the last four years, which is very healthy considering its size. The company’s revenues have been increasing and have hit a new record for eight consecutive quarters. Adobe's earnings have also increased at a CAGR of 37 percent over the last five years.

While Adobe’s standalone PE ratio looks on the higher side, its PEG ratio based on the last five year’s earnings CAGR is below 1.5x, which looks reasonable. Adobe stock looks attractive at these valuations and looks like a buy for the long term. If the company can come up with good numbers in its earnings release this week and provide promising guidance, the uptrend could resume.