When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Adobe Inc. (NASDAQ:ADBE) as a stock to avoid entirely with its 46.3x P/E ratio.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.  

With its earnings growth in positive territory compared to the declining earnings of most other companies, Adobe has been doing quite well of late.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

NasdaqGS:ADBE Price to Earnings Ratio vs Industry August 9th 2024

Keen to find out how analysts think Adobe's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?  

Adobe's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.  

If we review the last year of earnings growth, the company posted a worthy increase of 6.8%.   However, this wasn't enough as the latest three year period has seen an unpleasant 1.7% overall drop in EPS.  Therefore, it's fair to say the earnings growth recently has been undesirable for the company.  

Turning to the outlook, the next three years should generate growth of 22%  per annum as estimated by the analysts watching the company.  Meanwhile, the rest of the market is forecast to only expand by 10% each year, which is noticeably less attractive.

In light of this, it's understandable that Adobe's P/E sits above the majority of other companies.  It seems most investors are expecting this strong future growth and are willing to pay more for the stock.  

What We Can Learn From Adobe's P/E?

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Adobe maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected.  At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio.  Unless these conditions change, they will continue to provide strong support to the share price.    

You should always think about risks. Case in point, we've spotted   1 warning sign for Adobe  you should be aware of.  

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.