Adobe stock has staged a strong comeback as investors rotate back to software companies following the sell-off a few months ago. ADBE is hovering at its highest level since June 2nd this year after rising by 42% from its lowest point this year. This rebound may continue after the ongoing Workday acquisition rumors.
Adobe’s business is doing relatively well despite the SaaSpocalypse fears
ADBE, the creator of popular tools like Photoshop, Illustrator, Lightroom, and InDesign, has been one of the top casualties of the ongoing SaaSpocalypse fears among investors. Its stock bottomed at $190 earlier this year, down sharply from its all-time high of $698.
The main reason for the sell-off is the fear that the ongoing AI revolution will make some of its products obsolete. For example, it is now possible for anyone to use AI to edit photos and design products like logos and cards.
The crash made Adobe a highly undervalued company, with its forward price-to-earnings ratio falling to 10. Its forward multiple is much lower than the technology sector median of 24 and the five-year average of 26. The S&P 500 Index, which tracks the biggest companies in the US, has a multiple of 20.
Fundamentally, Adobe’s business has slowed down in the past few years, a move that has made it make some mistakes along the way. For example, we believe that its $1.9 billion acquisition of Semrush was a mistake, as the search engine optimization (SEO) industry is changing amid the AI boom.
The most recent results showed that Adobe’s revenue jumped by 13% YoY in the second quarter to $6.62 billion. Its annualized recurring revenue (ARR) jumped to $27 billion, with Semrush contributing $480 million in it. It ended the quarter with $22 billion in remaining performance obligations (RPO).
Analysts expect that Adobe’s business will experience some modest growth in the coming years. Its annual revenue is expected to grow by 11% this year to $26.52 billion, followed by $28 billion next year.
Adobe may benefit from the Workday purchase
A potential catalyst for Adobe shares is the rumor that Silver Lake is on the verge of acquiring Workday, a top company in the software industry. If this purchase happens, it will be one of the biggest take-private deals in the industry because Workday has a market cap of over $50 billion.
The purchase will, however, benefit other software companies that have plunged in the past few months. That’s because it will raise the possibility of more mergers and acquisitions in the industry.
Adobe’s $107 billion market capitalization means that it would be difficult for it to be acquired. As a result, the management may decide to boost its share repurchase program because it believes that it is highly undervalued. It repurchased 8.5 million shares in the last quarter. As a result, its outstanding shares have dropped to 399 million from 486 million in 2020.
Adobe stock technical analysis
ADBE stock has jumped sharply in the past few months, moving from $190 to $270. It has already crossed the 200-day weighted moving average (WMA), a sign that bulls remain in control. The Average Directional Index (ADX) has jumped to 22.8, its highest level since July 1, a sign that the upward momentum is continuing.
There are signs that the stock has formed an inverted head-and-shoulders pattern, a common bullish reversal sign. Therefore, the path of the least resistance for the stock is upwards, with the next key target to watch being the psychological level of $300.
