About Adobe
I will always be the first to admit that I am pretty much the furthest thing from being the creative type.
Case and point, even when I was a young child in art class I would make extensive lists of local train stops while my friends drew their parents or their dog.
I still remember it to this day.
Linden, Central, Noyes, Foster, Davis, Dempster, Main, South Boulevard, Howard (continues if the express line is in service), Belmont, Wellington, Diversey, Fullerton, Armitage, Sedgwick, Chicago, Merchandise Mart, Clark/Lake, Stake/Lake, Randolph/Wabash, Madison/Wabash, Adams/Wabash, Harold Washington Library, LaSalle/Van Buren, Quincy, Washington/Wells and then back northbound with the next stop being Merchandise Mart on its way back to whence it came.
I was a little different, but it’s cool.
At any rate, to this day I still struggle to draw a stick figure and I’d much rather bask in my true element, writing.
Hence the blog, I suppose.
Given that I am clearly just not wired to illustrate (manually or digitally for that matter), it would honestly be fair to say that I haven’t really given it a fair chance, as I don’t recall ever using any sort of software program on my computer to put together a simple flyer or draw something of any kind but maybe if I just gave Photoshop a chance, the world just might appear a lot larger to me after all.
Since we are on the subject, Photoshop is one of Adobe’s most prized assets that it basically leases out to its users.
Better yet, its subscribers, as that is how this company generates the vast majority of its revenues, which is the general means of revenue generation for many, many prominent software as a service (SaaS) companies.
Headquartered in San Jose, California, Adobe is probably the most prolific creative illustration platform in the world with somewhere in the neighborhood of 30 million paying subscribers that have access to the platform’s tools, enhancements and various other features where the creative juices are undoubtedly flowing and firing on all cylinders.
Adobe works with and offers its platform to individuals simply interested in design or working on one-off projects as well as major agencies such as schools, universities, businesses and many others that depend heavily on marketing their products and/or services in a way that is most appealing.
In order to stay ahead of the competition and continue offering a superb product and creative playground for its users, Adobe has made many notable strategic, accretive acquisitions over the years such as with its purchase of early software pioneer Aldus Corporation, efficiency driver Accelio, prominent software player Macromedia, marketing software company Marketo, among many other acquisitions and it is currently in the process of attempting to acquire privately held design application company Figma for around $20 billion.
We like that Adobe has been growing over the years both organically (i.e., through continuing to develop its internal products and offerings) and inorganically (i.e., through acquisitions), as it certainly has paid off in more senses than one, one of which including the fact that Adobe has landed some very high-profile accounts.
To name a few, some of the company’s customers include the likes of Coca-Cola, Prudential, Dick’s Sporting Goods, Cisco, Hugo Boss, The Home Depot, IBM, Lenovo, Land Rover and even professional sports franchises (which, of course, are by all means business operations) such as the Golden State Warriors, not to mention all of the higher education accounts that this company has more than likely landed, and, of course, it would be a mockery if one didn’t account for the individual illustrators that add to Adobe’s top-line.
Nevertheless, knowing that the company has a well defined niche that it has continued focusing on since way back when and that it has many (the list goes on and on) high-profile clients that can and will more than likely continue paying for access to Adobe’s platform and services thereof during the best of economic times as well as the worst of economic times, especially as branding, marketing and appealing to the masses becomes increasingly critical for companies and other organizations to do in order to stay relevant should lend prospective shareholders a bit of fundamental confidence track record and its future.
Adobe seems like a great partner for said entities.
It is also worth briefly noting that while we are far from experts regarding the Cloud and artificial intelligence (AI), we have a lot of general enthusiasm with respect to how a company such as Adobe can leverage its capabilities within these two categories, as it is already seemingly taking hardly any time to inundate itself in the Cloud through its various applications.
We also undoubtedly view AI as being a future, well defined cornerstone for Adobe, however, with that, with all of the recent AI-related hype surrounding the market, particularly technology stocks, Adobe’s stock (NASDAQ: ADBE), like many others such as Nvidia, are far from trading at relatively cheap levels, which, obviously, is something to consider, especially for those that are intent on decreasing their chances of overpaying for an ownership stake in a company through its stock.
Of course, we could be wrong and for all we know Adobe could trade much higher than its current levels, but a major aspect of investing is risk mitigation and when the downside begins looking more and more greater than the upside, one should ponder and adjust their risk parameters and framework accordingly.
Still, Adobe itself rocks and it is an absolute staple in the digital production and creative content manufacturing realm, irrespective of where it is currently trading.
Friends, meet Adobe and its financials.
Adobe’s stock financials
Adobe is currently a $241.07 billion company (according to its prevailing market capitalization) with an associated share price of $528.89, a price-to-earnings (P/E) ratio of 49.71 along with no annually dished out dividend to its shareholder base, all of which makes a good amount of sense given that technology companies (regardless of size) hardly ever offer shareholders a consistent, annual dividend, more than likely due to the cash they aim to retain in order to continue growing and investing in its technologies both internally and externally (i.e., through acquisitions), which we certainly don’t mind in the context of Adobe, especially given its relatively successful track record as it relates to strategic acquisitions.
Additionally, the company’s current price-to-earnings ratio is certainly a bit full of itself, given that it is commonly held that a price-to-earnings ratio of 20 indicates that a stock is trading at exactly fair value and subsequently anything greater than this value implies that it is trading at a premium (i.e., is overvalued) and being that Adobe’s P/E ratio is over thirty points greater than that of the fair value benchmark, sure, the company’s shares (NASDAQ: ADBE) are objectively overpriced, however, if Adobe has the revenue growth to back it up (and one also should consider the potential with AI and the Cloud), it might actually not be considered overpaying if there is more growth ahead to both the company’s top and bottom lines.
Before delving further into the company’s revenue figures in determining if the growth has been there in recent years, it would serve us well to take a quick gander at the company’s balance sheet.
With that, Adobe’s executive team is in charge of around $27.1 billion in terms of total assets as well as approximately $13.1 billion in terms of total liabilities, which indicates that this company’s balance sheet breakdown is quite impressive and might we add fortress-like, as it can seemingly protect this company from any (ordinary) future financial headwinds and/or downturns and it also allows the company to continue innovating, as it is likely engaged in a fair bit of debt financing, however, it appears as though Adobe’s management team is employing debt in a responsible fashion, as its total assets still outweigh its total liabilities by miles.
With respect to the company’s income statement, Adobe’s total annual revenues since 2018 have been growing at a fantastic rate; steadily but surely.
In being more specific, the company’s total annual revenues in 2018 were pegged at just north of $9 billion, $11.1 billion the following year, nearly $12.9 billion in 2020, $15.7 billion in 2021, leading all the way up to its latest reported total annual revenue figure of $17.6 billion, as reported in 2022.
This revenue growth highlights one of the best parts of Adobe’s business model; it is pretty much completely digital.
This is a resounding positive for a few different reasons, one being that this company’s revenues are largely indifferent to people working in-person or remotely, as whether it is a part-time freelance illustrator in Kennesaw, Georgia or a marketing executive at IBM, folks can and do use Adobe and its applications and products practically anywhere, which is likely why its revenues didn’t skip a beat with the initial public onset of COVID-19.
Therefore, if other variants or pandemics were to rear their ugly heads, we have confidence that Adobe’s revenues can continue growing amidst these threats given what history has shown us thus far.
Onto the state of the company’s cash flow statement, Adobe’s net income and total cash from operations have remained quite stable as well (also referencing since 2018), not even coming close to seeing a single negative year, which, again, makes sense given the digital nature of its business and the relatively high likelihood that this a very cash flow generative company given its market share in the digital content space.
Adobe’s stock fundamentals
Speaking of this company’s ability to generate positive cash flow, TD Ameritrade’s platform has Adobe’s trailing twelve month (TTM) net profit margin displayed as 26.34% to the industry’s respective average of a mere 2.69%.
Obviously, Adobe has done nothing short of a fantastic job at executing and extracting a net profit from its business offerings and products far better than the competition (on average), which could be attributed to a few things, including (but not limited to) it simply having superior product offerings and digital capabilities as well as maintaining and leveraging a substantial amount of brand power, allowing it to perhaps charge more but also offer clients more than its smaller competitors are able to furnish.
As it relates to the company’s TTM returns on assets and investment(s) and how they size up to the industry’s listed averages, the competition (on average) is still well behind that of Adobe’s figures in these respects, for instance, with the company’s TTM return on investment towering over at 25.05% to the industry’s respective listed average of 15.60%, which, evidently, is a material difference indicating that Adobe has done a far better job at deploying capital and eeking out outsized returns on the investments it has made in the past, seemingly paying dividends today versus the competition’s solid, but hardly competitive average.
Should you buy Adobe stock?
Given all of the facts, figures and hints of overall market sentiment we have discussed above regarding Adobe, we do like this company.
A lot, actually.
I mean, what’s not to like about a keenly cash flow generative industry pioneer and domineer with a more than strong TTM net profit margin (with respect to the average of its peers), a lean, healthy balance sheet, annually growing total annual revenues and a clear path to succeeding moving forward with respect to artificial intelligence and the Cloud?
The answer to this question, unfortunately, lies within this company’s present valuation.
Among all of the aforementioned positives, we still find it rather challenging to look at ourselves in the mirror and justify overpaying for an ownership stake in this company by this much of a premium, especially given that, again, many technology stocks across the board are trading at rich valuations due to recent AI hype, which is very real but also very reminiscent of the dot-com bubble in the late 90s, and many of us know exactly how that ended up playing out.
Therefore, in the interest of objectivity and preservation of capital, we think it is fair to give this company’s stock (NASDAQ: ADBE) a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.