Adobe stock: is it a bargain ahead of earnings?

Adobe stock price has stabilized recently, rising by ~11% from its lowest level this year.

ADBE rose to $270 as investors bought the dip and as investors waited for the upcoming financial results. So, will these gains hold or is this a bull trap?

Wall Street analysts have slashed their Adobe stock price target 

Adobe share price has been in a strong downward trend in the past few years, a trend that accelerated this year amid concerns that advanced AI tools will hurt its business.

Its plunge has coincided with that of other software companies like Atlassian, Intuit, and Salesforce.

These fears, together with the ongoing Adobe stock crash, have pushed Wall Street analysts to slash their targets on the company.

For example, Jefferies slashed its target to $290 from the previous $400.

Similarly, Piper Sandler cut from $470 to $330, while UBS lowered from $375 to $340. Other analysts who have slashed their targets recently are from companies like Oppenheimer, Goldman Sachs, and BMO. Goldman was the most brutal as it initiated its coverage with a sell rating.

Still, the consensus among most analysts is that Adobe stock still has some upside to go. The consensus price target for the stock is $382, up by 45% from the current level. A year ago, however, the consensus was at $570 as the stock rose.

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Adobe has become a bargain 

In addition to the rising fears of AI disruption, Adobe stock price has plunged because of the valuation reset that is happening in the software industry.

Historically, software companies had some of the highest valuation multiples as their growth momentum continued. Investors focused on their moats, ability to upsell more products, and their regular cash flow.

This valuation reset has left Adobe being a highly undervalued company. Seeking Alpha data shows that the company has a forward PE ratio of 11. In contrast, its five-year average is 30, and the technology sector median is 21.

The same is happening among other valuation metrics. For example, the forward EV to EBITDA multiple has dropped to 8, much lower than the five-year average of 29.

A cheap company is not always a good investment. A good example of this is PayPal stock, which has been a bargain for a few years and is now attracting attention from Stripe.

However, at times, it can be wise to buy a cheap company with solid fundamentals. In the case of Adobe, its most recent results showed that its revenue grew by 10% in the third quarter, while its free cash flow soared to a record high of $3.9 billion.

According to Yahoo Finance, analysts expect that its annual revenue in 2024 was 9.57% and that its growth trajectory this year will be 9.05%. Its EPS will also continue growing, partly because of its share repurchases.

Adobe share price prediction: Technical analysis 

Adobe’s weekly chart is not looking pretty. It has fallen from $638 in 2024 to the current $270. The S&P 500 and Nasdaq 100 indices have soared to a record high in the same period.

A closer look shows that the stock formed a small hammer candlestick last week. As the name suggests, this pattern comprises a small body and a long lower shadow. This pattern often leads to a big reversal.

Therefore, the stock will likely continue rising as bulls target the upper side of the descending channel at around $300. 

However, a drop below the year-to-date low at $245 will invalidate the bullish outlook. It will mean that there are some bears in the market.