Motley Fool: Adobe building

Adobe’s (Nasdaq: ADBE) stock has been struggling mightily in recent months, falling by more than 20% this year. It has not been trading at such low levels since 2023. This presents an opportunity for long-term investors to buy into a leading tech company.

Why has the stock fallen? Well, artificial intelligence (AI) is making it easier for anyone to be a photo editor these days, even without advanced skills, and that can make it difficult for Adobe to convince consumers that its premium-priced software is worth subscribing to now.

But Adobe has flexibility to adjust pricing and offer promotions to win over customers – its gross profit margin is close to 90%, giving it plenty of room to maneuver on price while still ensuring it posts strong earnings numbers. Adobe has also enhanced its applications with AI, and that has helped boost its sales.

Despite these concerns, the business has not been performing badly. Its report for the third quarter (which ended Aug. 29) showed revenue growing 11% year over year and net income increasing by 5%.

While there is some risk with the stock, its valuation looks compelling, with its recent forward-looking price-to-earnings (P/E) ratio of 15. That builds in a healthy margin of safety. The business may face challenges, but by no means is it in a dire situation. (The Motley Fool owns shares of and recommends Adobe stock and options.)

Ask the fool

Q. If the stock market falls by, say, 500 points, would that be cause for great concern? – K.T., Rochester, Minnesota

A. Focus on percentages, not points. On Oct. 19, 1987 – “Black Monday” – the Dow Jones Industrial Average plunged 508 points in a single day, from about 2,247 to around 1,739. That was a 22.6% decrease – a significant drop, indeed. (The S&P 500 fell 20.4% that day.) But 38 years later, the Dow has grown considerably; it was recently nearly 49,000. If it were to fall by 500 points today, that would be a drop of only about 1%. And a 22.6% drop today would be around 11,000 points!

The market is always going up or down by a little or a lot, and big drops are not that uncommon. Indeed, the S&P 500 pulls back by 10% or more about every other year, on average, and by 20% or more about every seven years. It has always recovered eventually and gone on to hit new highs. As long as you are a long-term investor, not keeping money in stocks that you might need within the next five or 10 years, you will likely do fine riding out any downswings.

Better still, market downturns can be excellent times to go shopping for great stocks that are suddenly priced very attractively.

Q. How can I learn about insurance? – W.G., Greensburg, Pennsylvania

A. You can learn a bunch from the Insurance Information Institute at iii.org/insurance-basics, and from the National Association of Insurance Commissioners at naic.org/consumer. Books such as “Insurance for Dummies” by Jack Hungelmann can also be helpful.

My smartest investment

My smartest investment move was watching my mother, who modeled making sound financial decisions and who also invested in the stock market. She watched “Wall Street Week” religiously on Friday nights. She invested herself, which was unusual for a married woman at the time, and she let me invest via a custodial account when I was relatively young. I followed her lead, invested what I could and added along the way. When IRAs became available, I made sure to contribute to one each year.

I now have a sizable portfolio. There have been ups and downs, but the trend has always been upward. It has been fun to learn and to watch business shows just like my mother and to see my money grow over the years. My advice is to start early, add as much as you can and don’t remove anything for any reason. There’s no place like the American stock market. – B.L., via email

The Fool responds: What a wonderful story! Not all of us were fortunate enough to have financially savvy parents, but we can still start investing as soon as possible. And if we’re parents, we can get our kids interested in managing money well and in investing. A great way to do so is by example, as your mother did.

(Do you have a smart or regrettable investment move to share with us? Email it to TMFShare@ fool.com.)