Adobe Inc.
Adobe is one of the largest and most diversified software companies in the world, enabling Creators from all walks to express their creativity.
From Photo Editing, Video Editing, Cartoon Animation, and UX Design. You name it, they have it. But are they any good? Go ahead and search “best photo editing software” or “best video editing software”… oh yea.. they’re really good.
Adobe is to Creators, what Office365 is to Office workers.
Okay enough of the pep talk on Adobe, show us the financials!
Financials
Revenues, Operating Income, as well as Operating Cash Flow has been growing consistently for the past 10 years and they are likely to keep up this trend because they are still led by the same CEO since 2008.
Sure, the company is doing well and is likely to continue doing so.. but is the stock discounted enough to buy?
Valuations
My simple calculation of Adobe’s Intrinsic Value is $283 (conservative), almost where it currently(24 Sep 2022) trades at.
If we assume Figma is just a flower vase which does nothing but look pretty, i.e., does not generate any income, then the Intrinsic value would be $240.
Technical Analysis
Considering the support of $260 which coincides with the pandemic low, I’m skeptical that it breaks much below it because Adobe’s business has grown stronger since 2.5 years ago. At most, I will expect the share price to dip slightly below $260 before reversing course, taking us up up and away.
Disclaimer: I may be wrong and have been VERY wrong before so don’t just take my word for it and always do your own analysis and make your own decisions.
Figma Acquisition
The hot news about Adobe is that it is acquiring Figma for $20B and investors are wondering, “Is that a good acquisition?”
Well, my short answer is Yes and here’s why.
Figma is eating everyone’s lunch, w/ nearly 80% market share since 2021. By acquiring Figma, Adobe effectively killed off a beast of a competitor and regained monopoly.
Figma lets you build apps, websites, and more w/o a single line of code. It is a darn good software, highly intuitive and beginner friendly. Once you start using it, you’re hooked. I know it because I used it for a school project. The inertia to switch to another software is immense thus locking in their market share.
By acquiring Figma, Adobe can introduce it to it’s existing customer base which could accelerate Figma’s adoption, growth, and moat. On top of that, Figma could also use some help from Adobe’s developers and sales team etc.
I know paying 50x P/S sounds a lot, but let’s do a bit of math.
Figma currently generates $400mil w/ 90% Gross Margin, growing at 150% y/y. Let’s say in 3 years, Figma generates $1.2Bil (CAGR: 44%) , that’d be $1Bil of pure profits, which translates to 20x P/GP. Imagine paying 20x forward P/GP for a company growing at > 40% w/ 90% gross profits.. does it still sound expensive? Not really..
Conclusion
Adobe is a dominant software business, has a long history of performing, and currently trades at a very attractive price. With the acquisition of Figma, Adobe once again regains monopoly of the Creators product suite. If I don’t already have a position, I would consider getting some here and more at $260, then $210, and below.