Adobe – Fountainheadinvesting

Adobe (ADBE) – $506

It has strong defensible franchises, great branding and leadership. Very profitable in all its segments with operating margins in excess of 30%.

The threat of AI replacing some of the video editing and other products is still in its infancy and Adobe is also working on its own AI initiatives; they’ve just been slow to roll it out.

Revenue growth has slowed to 10-12% for the next three years, and management did disappoint for the next quarter’s guidance. However, Adobe is also a good earnings story with 13-14% earnings growth.

The only problem is the valuation, and the market perception that this is a mature company with $20Bn in revenue. At 28x earnings and 10.5x sales there’s not much left for appreciation with that slowing growth.

I would prefer to buy on declines at around $470. At $506 I would expect a return of about 12% or so a year.

The main strategy is patience to get more margin of safety, especially when a solid company like Adobe gets clobbered 20% for a slightly lower than expected guidance. With a higher 10 year yield of 4.30, long duration tech stories always face more resistance, even more than the overall market. And there’s the volatility as you mentioned. By one measure, trading in options has surpassed that in the stock market for the first time since 2021, according to Goldman Sachs.

https://www.wsj.com/livecoverage/stock-market-today-dow-jones-03-15-2024/card/frenzy-over-ai-and-nvidia-turbocharges-the-options-market-PijdBZpnDW4BfwZMerfM

I don’t see this froth, volatility and overpricing dissipating; Algo trading, ODTE, (one day expiry options) are pretty much a regular part of the markets now. For us the best strategy is to be patient with limits and accumulate in tranches, even if we miss some opportunities. The goal is a 3-5 year investment and we’re not timing or trading in the market so we’ll have to ride through the rough patches, with confidence in the fundamentals.