Adobe Inc. (ADBE)

Equity
US
Technology

RISK

RETURN

Key risk factors

Strong trading liquidity

Limited default risk

Modest price volatility

Key return factors

Very strong margins and returns

Greatly overvalued vs peers

Very low or no dividends

Company profileAdobe Inc. operates as a diversified software company worldwide. It operates through three segments: Digital Media, Digital Experience, and Publishing and Advertising. The Digital Media segment offers products, services, and solutions that enable individuals, teams, and enterprises to create, publish, and promote content; and Document Cloud, a unified cloud-based document services platform. Its flagship product is Creative Cloud, a subscription service that allows members to access its creative products. This segment serves content creators, workers, marketers, educators, enthusiasts, communicators, and consumers. The Digital Experience segment provides an integrated platform and set of applications and services that enable brands and businesses to create, manage, execute, measure, monetize, and optimize customer experiences from analytics to commerce. This segment serves marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, and executives across the C-suite. The Publishing and Advertising segment offers products and services, such as e-learning solutions, technical document publishing, web conferencing, document and forms platform, web application development, and high-end printing, as well as Advertising Cloud offerings. The company offers its products and services directly to enterprise customers through its sales force and local field offices, as well as to end users through app stores and through its website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, software vendors and developers, retailers, and original equipment manufacturers. The company was formerly known as Adobe Systems Incorporated and changed its name to Adobe Inc. in October 2018. Adobe Inc. was founded in 1982 and is headquartered in San Jose, California.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

45.70

35.70

PEG

3.10

P/B

14.20

10.10

P/S

10.90

10.00

P/FCF

33.60

28.30

EV/EBITDA

26.60

25.70

From both historical and forecast perspectives, the stock is considerably overpriced compared to similar stocks. In particular, the stock is overpriced on P/E, 'expensive' on EV/EBITDA, and trading at neutral levels on P/FCF.

Performance: Slightly negative

The stock's performance has been mixed in the past six months, with growth following a decline. The stock has lagged its global peers from the same sector and industry (as shown above), underperforming then by 28ppts in total. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is slightly negative.

Analyst view: Somewhat favourable

The average target price is 662 and suggests 37% upside potential. Usually, this means a BUY recommendation among investment firms, or a recommendation to increase one's position in this instrument in the next 12 months. The most optimistic analyst has a target price of 732.5. This translates into 51% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 445.0. This is equivalent to 8% downside potential in the worst case.

Profitability: Very strong

RoE

Adobe Inc. reported a return on equity (RoE) of 31.2% in the last 12 months, down from 33.0% in FY22. The market consensus projects an RoE of 54.8% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 17.0% in the last 12 months, a decrease from 17.5% in FY22. The market analysts predict that RoA will be 30.4% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) grew to 24.5%, above the peers. The consensus estimate for FY24 for RoCE is 52.4%, again ahead of the peers.

Net margin

EBITDA margin

Historically, ADBE has reported very strong net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 24.7%, down from 27.0% in FY22. The company has reported strong EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 40.8% in the last 12 months, up from 39.7% in FY22.

RoIC / WACC = 3.2(excellent value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 3.2 in the past several years. This ratio implies a excellent shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

ADBE reported revenue of USD 19 936mn in the last 12 months, up 3% from FY23. The dynamics of cash flow, as measure by free cash flow (FCF), were rather similar. EPS fell 11% from FY23 to USD 10.53. Market expects EPS to reach USD 18.03 in FY24.Revenue growth has been moderate in the past several years (positive-to-neutral), while EBITDA growth has been steady. Net income has grown only slightly in recent years. The FCF trend is in line with EBITDA. On the positive side, revenue dynamics is very stable.

Dividends: Very low or none

The company does not pay dividends at all, or it pays them sporadically.

Default risk: Limited

The risk of default is minimal. We note robust profitability, solid return on capital, strong debt servicing capacity, adequate interest coverage, solid cash flow generation, and an favourable capital structure, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, excessive margin volatility, and poor working capital management.

Volatility: Modest

In normal market circumstances, ADBE is as volatile as an index. Put differently, without outstanding market volatility or shocking company news, the stock's price will move with the index. The stock's losses on its worst days (less than 1-5% of the time) will range from moderate to average.

Stress-test: Modest

In highly turbulent market conditions, ADBE is as volatile as an index. In other words, the stock will move with the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be limited.

Selling difficulty: Very low

ADBE boasts very high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains extremely favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.