Adobe has gotten torched over the last six months - since December 2024, its stock price has dropped 23.2% to $413.50 per share. This may have investors wondering how to approach the situation.
Following the drawdown, is now a good time to buy ADBE? Find out in our full research report, it’s free.
Why Does Adobe Spark Debate?
One of the most well-known Silicon Valley software companies around, Adobe (NASDAQ:ADBE) is a leading provider of software as service in the digital design and document management space.
Two Positive Attributes:
1. Elite Gross Margin Powers Best-In-Class Business Model
Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Adobe’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 89.2% gross margin over the last year. Said differently, roughly $89.15 was left to spend on selling, marketing, and R&D for every $100 in revenue. 
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Adobe has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 41.7% over the last year.
One Reason to be Careful:
Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Adobe’s billings came in at $5.95 billion in Q1, and over the last four quarters, its year-on-year growth averaged 8.9%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
Final Judgment
Adobe’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 7.6× forward price-to-sales (or $413.50 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More Than Adobe
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