Stock Valuation: Adobe Systems Inc. (ADBE)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price    
ADOBE SYSTEMS INC US/
NAS
Technology – Application Software – Software – Application USD251.31    
@ 03 Jun 2018    
COMPANY PROFILE Adobe Systems Inc offers a line of software and services for content creation and the measurement of digital advertising and marketing. Its software applications includes Photoshop and Lightroom, Adobe Analytics, Media Optimizer and Campaign Manager.

Adobe develops and sells software and services for content creation and the measurement of digital advertising and marketing. The company is organized into three business segments: digital media, which includes numerous applications housed in Creative Cloud, such as Photoshop and Lightroom; digital marketing, which includes Adobe Analytics, Media Optimizer and Campaign Manager; and print and publishing.

Stock Code ADBE    
Stock Valuation Below                  

Adobe Systems Price to Cash Flow

Price to Cash Flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as Price to Earnings and Price to Sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the Price to Cash Flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock. 
At the price of USD251.31 as at 03 Jun 2018, Adobe Systems Inc is trading at a Price to Cash Flow Ratio of 35.8 times last 12 months cash flow.  This is a 63.0% premium to its historical average Price to Cash Flow Ratio of 22.0 times. 
Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock. 
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued. 
To find out more about our valuation methodology, click here.             
Source of Data: Price to Sales chart is from ProThinker Stock Report. Company description, historical financial statements data and price data are from gurufocus.com. Estimates are from gurufocus and/or 4-traders.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved. 

Leave a Reply

Your email address will not be published. Required fields are marked *