HomeMost PopularAn Ode to Adobe: Trimming Time for Financial Safety

An Ode to Adobe: Trimming Time for Financial Safety

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Let’s talk about Adobe, for a year now we’ve admired the company and its performance. It’s been a wild ride of highs and lows, but recently, it seems it’s time to take a step back and make some adjustments.

Almost exactly one year ago, we impacted the direction of Adobe with our article: β€œAdobe: Buy The Dip In This Excellent Compounder.” It’s our exclusive article on the company (NASDAQ:ADBE), and it’s been a successful year with the stock up more than 77% since our feature. But today, we bring a new message: It’s time to trim.

Putting the Journey in Perspective

In our first article, we highlighted how Adobe is a Compounder, showing favorable demand dynamics over the years. The company had exhibited stellar growth in revenue and net income. Furthermore, it presented an appealing investment opportunity, trading at a discounted historical valuation. Although we voiced concerns about the interest rate cycle, potential post-pandemic service demand pullback, and the $20 billion Figma acquisition, we found the overall prospects to be attractive.

The Course of Events Since

Fast forward to the present, and Adobe has reported strong quarters, reinforcing our confidence in the company’s performance. The supply of shares has been reduced through buybacks, and progress has been made on the challenges we highlighted earlier, such as the Figma acquisition and the interest rate cycle. Financial results also demonstrate recovery from the post-pandemic slump, further strengthening the case for Adobe.

Why It’s Time To Trim

However, the company’s stock now trades at an exceptionally high valuation, indicating a potential pullback. The stock’s pricing appears to have outstripped its actual value, signaling a need for correction. Despite improvements in fundamentals, the pricing seems excessively inflated, pointing towards an imminent downward correction.

Understanding the Risks

There are risks associated with this decision, as high-quality companies can sometimes surpass expectations, leading to further growth. Additionally, a favorable resolution in the Figma case could elevate the stock’s value. However, we believe that strategically trimming the position now, while aiming for re-entry at a more favorable price point, aligns risk and reward more effectively.

Final Thoughts

Despite the robust fundamentals of Adobe, the current price seems to overstate its value. While the company’s prospects remain strong, we believe that, at the current multiple, trimming the position and waiting for a better entry point presents the most sensible approach.

Good luck out there and cheers!

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