Should You Own Adobe?

With new cases of the coronavirus spiking in the US and worldwide .

With the already historic unemployment levels and job losses in recent months .

With massive uncertainty in hospitalsbanks, and other industries.

And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest today. And this number grows smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

This is a huge part of things.

But another huge part of this that few think of is also losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you achieve your retirement goals.

To help you avoid bad investments, in recent articles I’ve shown you several stocks to avoid buying…

Today I want to show you another stock to avoid at all costs so you can continue growing your investment portfolio.

1 Reason To Avoid Adobe

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials among other things.

But frankly none of those matter with Adobe Inc. (ADBE) due to its huge valuation.

Adobe provides software so people can create better content and do better marketing online.

Due to the rapid increase in content creation and marketing online in the last decade its revenues, profits, and cash flows all jumped significantly…

From 2010 to today its revenue increased from $3.8 billion to $12.4 billion.

This is an increase of 2.2X in the last 10 years.

Which led to huge increases in profits and cash flows in this time.

Its net income rose from $775 million in 2010 to $3.9 billion in the last 12 months.  This is a 4X increase in the last 10 years.

And its free cash flow rose from $943 million in 2010 to $4.9 billion in the last 12 months.  This is a 4.2X increase in the last 10 years.

And this growth in revenues, profits, and cash flows helped skyrocket Adobe shares in this time.

From $36.78 per share at the beginning of 2010 to $502.82 per share as of this writing.

This is an increase of 12.7X or 1270% rounded up.

You’re doing well if you earn 10% investment returns per year on the stocks you own.  Adobe produced investment returns of 127% per year on average over the last decade.

Its growth should continue as more businesses work digitally during and after this crisis.  Which is illustrated with Adobe’s continued growth in revenues, profits, and cash flows even during this pandemic.

This is all great for Adobe and its shareholders… But it also leads to a huge problem.

It’s massively overvalued.

  • Its P/E is 63.3.
  • Its P/CF is 46.
  • And its forward P/E is 45.3.

I look to buy companies with valuations below 20 on all these metrics to consider it undervalued or at worst fairly valued…

Adobe crushes this threshold.

Why below 20?

Because that means it’s at worst fairly valued… And if its significantly under 20 that means its undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have better chances of earning higher returns owning its stock over time. And these things combined make the stock a less risky investment.

With Adobe stock being so overvalued it means there is no margin of safety… That you have a far lower likelihood of making money owning its stock over time.  And these make the stock riskier.

Why is it so overvalued?

Because its share price rose 12.8X over the last decade while its profits and cash flows rose 4X and 4.2X respectively.

When share prices rise faster than profits and cash flow it leads to an overvalued stock… Especially when there’s an enormous difference between the rate of increase like there is here.

Does this mean I think Adobe stock will crash and burn?

No.  I expect it to continue performing well going forward… But not as well as it did in the past due to its large valuation.

For the reason of its overvaluation I recommend you avoid its stock…

There are safer, cheaper, and higher return stocks you can buy.  And I’ve already shown you some of them…

Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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