In this case, however, there is a big caveat. After all, one does necessarily need to wait for a great business to trade at a discount in order to position him/herself for above-market future returns. Usually subscribers to my investing group would be the first to hear about such an attractive opportunity that also appears to be trading near fair value. Only Microsoft ( MSFT), Alphabet ( GOOG) and Oracle ( ORCL) come anywhere close to Adobe when it comes to net income margins.Īlthough Adobe lost more than 20% of its value since I first warned of some major risks associated with the company and I later showed why Adobe is no-longer a $600 stock, the large drop in share price has now made ADBE fairly priced relative to its peers when we take into account stable gross profitability into account. Prepared by the author, using data from Seeking Alpha The large scale on the other hand, reduces the share of fixed costs and makes Adobe one of the highest net income margin businesses. The business' unique positioning that caters to many small content creators, free lancers and small to medium businesses also results in the highest gross margins within the broader peer group of large cap software and cloud players (see below).

What's even more attractive in Adobe's business model is its subscription-based model, which results in very high share of recurring revenue. To begin with, the company is growing at double-digit rates and its Creative and Document clouds have significant TAMs (Total Addressable Markets). When analysing Adobe ( NASDAQ: ADBE), it is very easy to get the impression that the stock represents a solid long-term investment opportunity, if you ignore the broader issue of capital allocation.

Adobe workfront