Despite more than a 63% rise from its March lows of this year, at the current price near $502 per share, we believe Adobe’s stock (NASDAQ: ADBE) is still undervalued. ADBE stock has increased from $307 to $502 since March 23rd compared to the S&P 500 which increased almost 55% from its recent lows. The stock has outperformed the market and was at a 52 week high in early September. The company has benefited from a subscription-based business model which helps with continuous revenue flow. In the first nine months (ended August 2020) of FY 2020 Adobe saw revenue grow to $9.4 billion, up by 15% y-o-y while earnings were recorded at $6.25 compared to $4.31 in the same period of the previous year.
Our dashboard What Factors Drove 179% Change In Adobe Systems Stock Between 2017 And Now? provides the key numbers behind our thinking.
The 175% rise in ADBE stock price between FY 2017 to FY 2019 is justified by significant growth in earnings during those two years. Adobe’s Revenue increased 53% from $7.2 billion in FY2017 to $11.2 billion in FY2020 (FY ends in November). This effect was amplified by margins increasing from 23.2% to 26.4% during this period. On a per share basis, earnings went up from $3.43 to $6.07. Higher revenue and margins were driven by overall industry growth and innovative solutions.
During the same period, the P/E multiple declined slightly from 52x to 51x. This was because the rise in stock price was lower than the growth in EPS. The P/E jumped in 2020 following the outbreak of coronavirus pandemic as more and