There are many ways to measure a company’s valuation. One is to look at a company’s earnings, and how it trades relative to its price. Another factor is to look at a company’s profit margins. Some companies, such as manufacturers, have high costs of production. It’s hard to get a great profit margin.
But other companies, like software-related businesses, can see great returns. That’s because the marginal cost of making an additional copy of software is essentially zero.
Investors have plenty of high-margin software-heavy companies to invest in. One potential play here that goes to the AI trend is Adobe (ADBE). Shares are up a scant 2% over the past year, yet shares sport a 24% profit margin.
In other words, for every $1 that comes in, nearly 25 cents can be used to expand the business, pay a dividend, buy back shares, or otherwise reward shareholders. And with revenues up over 10% in the past year and earnings rising by 22%, it’s likely that Adobe’s profit margin can further expand.
Action to take: Investors may like shares here, or on any market drop over the next few weeks. Adobe can likely benefit from any AI-related rollout in the years ahead.
For traders, shares have been trending higher since June. The December $630 calls, last trading for about $28.00, could see mid-double-digit returns from a further uptrend in shares over the next three months.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.