Adobe (NASDAQ:ADBE) could do no wrong for a while. From May 2021 through early September, ADBE stock went on a 41% run. It took a bit of a siesta in early October, then proceeded to go on another tear. By the end of November, it was pushing $700, an all-time high. 

In mid-December, JPMorgan downgraded ADBE stock, and it’s been downhill ever since. As of Jan. 28, it’s lost 25% of its value. 

I’ve been an Adobe supporter in recent years. I’m wondering if this latest downgrade is the beginning of an extended period of underperformance, or merely a correction to shake out the weak hands. I think it’s the latter. Here’s why. 

I Wasn’t Always a Fan of ADBE Stock

As recently as May 2019, I was convinced that Adobe’s valuation was a little too hot. So I suggested that it wouldn’t see $300 anytime soon. Well, I was wrong. It hit $300 in July 2019, fell back below this target a few weeks later, and except for a few days in late 2019, it’s been above $300 for 26 straight months. 

This is why I changed my tune a few months later in February 2020. I came out with the prediction that $400 was all but certain. It hit this mark in June 2020, finishing the year at $500. 

At the time of my February 2020 article, Adobe’s subscription revenue was on fire, growing 37% year-over-year (YOY) in 2019 and accounting for 83% of its Digital Experience operating segment. The software company estimated it would generate $13.2 billion in fiscal 2020 sales. Unfortunately, it didn’t quite get there. 

In fiscal 2020, Adobe had revenue of $12.9 billion, $300 million off its guidance at the end of fiscal 2019. In 2020’s fourth quarter, Adobe added a third operating segment to its business reporting: publishing and advertising, which combined its publishing business with its advertising cloud.  

As I look at its three most-recent fiscal years, I’m not sure why it created the segment. Its revenues have decreased from $669 million in 2019 to $398 million in 2021. 

How About Subscription Revenue?

However, its digital media and digital experience segments have continued to deliver. The former grew its revenues by 49.5% over the past two fiscal years, while the latter saw more subdued growth, up 38.7%.

The most important thing to keep in mind with Adobe is that its largest business (digital media) grew revenues in 2021 by 24.8% while generating a 96% gross profit. 

I’ll take that every day of the week and twice on Sundays. 

In 2021, subscription revenue across all three operating segments was $14.6 billion, or 92.4% of its overall revenue of $15.8 billion. Overall subscription revenues grew 22.4% in 2021. That compares to 15.2% in 2020. 

Adobe saw high gross profit for subscription revenue across its entire business — it was 90.6% in 2021, about the same as 2020. The fact it increased subscription revenue by 760 basis points suggests its business is strengthening despite the poor start for ADBE stock in 2022.

The Bottom Line on ADBE Stock

In January 2021, I included Adobe in a list of the 10 best stocks to buy on the Nasdaq. Unfortunately, its recent comedown since November makes my recommendation look less than stellar — especially when compared to the S&P 500. 

Moving forward, the JPMorgan analysts downgraded ADBE because higher interest rates mean lower future cash flow projections. The analysts believe that will more adversely affect stocks trading higher than 20x sales:

“Adobe has been one of the better performers across our coverage in 2021, especially in the large-cap category, as improvement in the economic environment coming out of the pandemic motivated companies to purchase digital marketing/advertising solutions to generate top-line revenue growth … The stock now stands less than 10% from our target price, and, as such, we are downgrading to a neutral rating.” 

From where I sit, Adobe’s current valuation of 15.3x sales isn’t much different than its P/S ratio in 2019. Yet Adobe’s revenues are growing faster. 

If you can’t own this stock for more than a year, I might be hesitant to buy in this market environment. However, if you can hold for 24 to 36 months or more, I’d consider a half position at current prices, holding back the rest to buy should it keep falling early in 2022.

As a company, you can’t find much better.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.