Adobe Investment Analysis
Adobe has returned over 700% in price appreciation over the past 10 years. However, over the past three months, the share price has been in decline. Let’s find out what this company does, the basic growth drivers, a bull and bear argument, and if the company could be an interesting investment.
Introducing Adobe
“Adobe is a global technology company with a mission to change the world through personalized digital experiences. For over four decades, Adobe's innovations have transformed how individuals, teams, businesses, enterprises, institutions, and governments engage and interact across all types of media. Our products, services, and solutions are used around the world to imagine, create, manage, deliver, measure, optimize, and engage with content across surfaces and fuel digital experiences. We are also empowering creators by putting the power of artificial intelligence in their hands and doing so in ways we believe are responsible. Our products and services help unleash creativity, accelerate document productivity, and power businesses in a digital world.” ~ Stolen straight from Adobe’s 10K filing
Adobe offers a wide range of products, services, and solutions to empower its customers and users to image and express ideas, create content, and bring any digital experience to life. Adobe focuses its strategic investments on two areas of growth. Digital Media, and Digital Experience.
What products/services does Adobe offer?
Abode has its business organized into three reportable segments
* Digital Media
* Digital Experiences
* Publishing and Advertising
The company explains the growth opportunities it sees for each of the business segments.
Digital Media:
The main focus of the Digital Media segment is the Creative Cloud, a subscription service that allows users to use all the individual products of the cloud service. The company believes that there is a significant opportunity through AI that lowers the difficulty of creativity and makes Adobe products more accessible. Adobe wants to expand the capabilities of Creative Cloud on the web as they launch Firefly and Photoshop on the web. The company tries to engage with new users and re-engage with old users through the use of free trials. As the Digital Media segment is centered around Adobe Creative Cloud and Adobe Document Cloud, it’s good to know some of the products in this segment, they include but are not limited to: Adobe Express, Adobe Firefly, Photoshop, Illustrator, Lightroom, Premiere Pro, Acrobat, Acrobat Sign, and many more products.
Digital Experience:
Consumers today buy experiences, not just products, and they demand personalized digital experiences that are relevant, engaging, seamless, and secure across an ever-expanding range of channels and surfaces. Business customers increasingly have the same expectations, driving business-to-business (“B2B”) companies to deliver equally engaging and seamless experiences as business-to-consumer (“B2C”) companies. The Digital Experience offers products under 4 pillars. These pillars and some of the products are:
* Data Insights and Audiences, Adobe Analytics, Customer Journey Analytics, Adobe Product Analytics
* Content and Commerce, Adobe Experience Manager, Adobe Commerce
* Customer Journeys, Adobe Marketo Engage, Adobe Campaign, Adobe Target and Adobe Journey Optimizer
* Marketing Planning and Workflow, Adobe Mix Modeler, Adobe Workfront.
Publishing and Advertising
The Publishing and Advertising segment contains legacy products and services that address diverse market opportunities including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web app development, high-end printing, and Adobe Advertising offerings.
Adobe Advertising delivers an end-to-end, demand-side platform for managing advertising across digital formats and simplifies the delivery of video, display, and search advertising across channels and screens.
At the bottom of this analysis, I will include a list of all the products/solutions Adobe offers.
- Sales channels
Adobe mainly sells through its own website for the creative cloud, but the company does employ a direct sales force to market and license the Experience Cloud solutions.
Most of the sales come through a subscription model where customers get access to a product for a specific period, some licenses are sold in perpetuity with maintenance and support, which includes rights to upgrade.
- Main sales regions
Most of the revenues are realized in the Americas, about 60%. EMEA (Europe, Middle-East, Africa) is responsible for about 25% of revenues, as APAC (Asia-Pacific) counts for 15% of revenues. Over the last years, the Americas have become more dominant as the main sales region.
Who are the executives?
What stands out is that Adobe employees are eligible for up to $11.000 per year towards university, and short-term learning opportunities, this is of course positive for the company culture, but also the intellectual level of employees in the company. But besides this opportunity, let’s take a short look at the key executives.
Shantanu Narayen, CEO
Narayen has been with Adobe since 1998 and eventually became CEO in 2007, after having been COO since 2005. In 2013, Narayen guided the company through the switch towards becoming a subscription business as they no longer accepted single payments, a risky, but very profitable move. Since 2007 adobe has returned about 1000% in stock returns peaking at 1500% in 2021 during the Covid-Bubble.
Daniel Durn, CFO
Durn has extensive experience in the role of CFO through stints in this position at Applied Material ('17-'21) NXP Semiconductors (‘15-’17) Freescale Semiconductors ('14-'15) Global Foundries (‘11-'14). Durn started his business career as an associate at KPMG in '97 after having served the Navy for 5 years, reaching the rank of Lieutenant.
David Wadhwani, CBO
Wadhwani rejoined Adobe as Chief Business Officer in 2021. Wadhwani originally joined the company in 2002 as SVP&GM, Digital Media Business Unit, a position he held until 2015. During this time period, the sock price increased by 300%.
- How is the company growing?
- Growth numbers
The Digital Media segment saw an increase in ARR of about 14.5% going from ‘22 to ‘23. In dollar terms, ARR at the end of ‘22 was $13.26 billion, which increased to $15.17 billion at the end of ‘23. In the same period, the cost of revenues increased 9%, net income increased 14%, and cash flow from operations increased 7%, staying a bit behind on the trend.
In ‘23, Adobe realized 94% of its revenues through subscriptions, this compares to93% in '22 and 92% in '21.
Net Cash Provided by Operating Activities was slightly down YoY as the company had to amortize R&D costs which had an adverse impact on the effective tax rate.
The company announced a $15 billion stock buy-back program in December '20, which would be active to the end of fiscal '24. However, due to an accelerated share repurchase agreement, the company completed this program in fiscal '23. The company has since activated a new program.
- Sales distribution (Mainly S&M, Affiliate, or organic?)
The company makes most of its subscription money through the Digital Media segment (75.7%), followed by Digital Experience (23.7%), and the smallest segment is Publishing and Advertising (0.6%). Both Digital Media, as well as Digital Experience grew 12% YoY, while Publishing and Advertising was down 7%.
The company does employ a large Sales & Marketing team, as this department takes up 28% of revenues, this has been stable over the past 3 years.
What does the balance sheet look like?
The company does not have any inventories. Trade receivables did increase by about 9% from $2.065 million to $2.224 million, but this increase in slower than the increase in overall revenues which means that the company is adding customers who are more inclined to pay, an overall positive of course.
Cash & Cash equivalents increased by 68%, or $2.9 billion, largely due to a decrease in Short-Term investments of $1.16 billion
- Company developments
On September 15th '22, the company entered into an agreement with Figma to merge for approximately $20 billion dollars. On December 15th '23 this merger agreement was terminated due to pressures from the FTC. Because of the termination, Adobe was forced to pay Figma a $1 billion termination fee, this termination fee has been written of in the Q1’24 earnings.
Bull arguments
1. AI monetization
AI has seen quite the hype over the past year, starting around March ‘23. Companies using the technologies surrounding it have seen mixed results with Google being very enthusiastic, but Meta less so on the revenues it has been able to create in the short term, as they said in their earnings call that they will spend enormous amounts on CAPEX without any short-term results. The reason I mention this is because Adobe has a very clear way to strengthen its business through AI. Although it may not immediately show in the numbers, the use case for editing images and video through AI shortcuts is a very clear one.
2. Moat
Adobe already has a huge moat and market share in image editing software. As illustrated in the picture below from Statista, the top three business process management (graphics) software products came from Adobe, with another product being somewhat lower on the list. Adobe owns about 82% of the market share in the industry.
3. Subscription model
Adobe operates through a subscription model. I find this one of the best ways of generating revenues as it simply keeps stacking revenues on top of one another. Adobe generates about 95% of its revenues in this manner, with a heavy focus and push for yearly subscriptions as these customers tend to be more sticky. This is best illustrated by looking at the revenues Adobe generated before, and after 2013.
Bear Argument
1. AI Product innovations
The innovations in AI also impact Adobe. What I mean by that is that the Google phones for example now let you do some simple editing of photos through easy-to-understand text prompts. This may be seen as a jab at Adobe’s moat, and should therefore be taken as a serious issue. Adobe is adjusting to this threat however as they try to pioneer in this field as well. Time will tell if the investments that are being made here will show the wanted results.
Is Adobe an interesting investment?
Adobe has a very strong moat, but one that is constantly under attack. As of now, the latest threat is AI. What we are currently seeing however is question marks regarding the monetization of it. The advantage Adobe has here is that they can use it and implement it in the platform, while phones for example, that are offering small AI solutions for simple editing, may keep it at that because it may not be worth the heavy investment. This argument comes from the Meta earnings where Zuckerberg admitted to investing heavily in AI infrastructure but that investors will have to wait for returns from it. This switch signals to me that the uncertainty regarding AI has become less of a risk. Shares of Adobe may be hit if AI enthusiasm dwindles, but this is good for the moat of Adobe which should reduce uncertainty in the longer term, and decrease risk, the stock will recover from it.
When we think about a decent price for Adobe and if it may be a good price to buy, a couple of factors should be considered. (Please read the disclaimer below)
For one, what has been the average PE, and if we look at the figure below by Macrotrends, we can see that the PE is relatively on the lower side when its compared to a historical average. As we do not give certain buy points/prices, we give an area in which we believe the company might be getting into good value territory, but again, this is not advice to buy or sell.
The way we look at this is by doing a very simple PE, or F/PE comparison the the S&P500. For this, we take into account that the S&P500 is trading at a 20PE on ‘24 EPS projections. By having done this analysis we believe that Adobe can trade at a premium to the market. Therefore we believe that Adobe will start to get into a fair-value range around a 24PE based on ‘24 EPS projections. This is based on the moat and market share the company has, and based on growth that is projected by analysts.
A list of all the product/solutions Adobe offers:
Photoshop, and Lightroom: Photo editing
Illustrator and Fresco: Creating digital graphics (Illustrator) Creating illustrations (Fresco)
Premiere Pro: Video editing
After Effects: Graphics and Visual Effects
InDesign: Design and Lay-Out app
Express: Video, Marketing, Social content creation
Firefly: Generative AI models for AI assisted creative expression
Stock: StockPhotos
Frame.io: Allows for frame specific comments in premiere pro and after effects
Substance 3D Collection: Ecosystem of 3D desktop apps
Behance: Social community for creators
Acrobat: PDF solution
Acrobat Reader: Software for viewing annotating and printing PDF documents
Scan: e-signature service
Analytics: Turns customer interactions into actionable insights
Product analytics: Enables teams to self-serve data and insight about products
Customer Journey Analytics: Set of analytics tools that allow brands to interactively explore and visualize the end-to-end customer journey
Real-Time customer data platform: Delivers real-time personalization's
Experience Manager: Combines digital asset management with content management systems.
Commerce: Highly customizable, end-to-end platform to manage, personalize and optimize the commerce experience
Marketo Engage: Customer experience management solution optimized for B2B cross-channel campaigns
Campaign: Optimized for managing B2C cross-channel marketing campaigns
Target: AI driven personalization engine that lets customers test, target and optimize content
Journey Optimizer: Allows brands to orchestrate and deliver personalized, connected customer journeys across any app, surface, screen or channel
Workfront: Enables teams to work more efficiently with tools to strategize, plan, execute, review and deliver on complex workflows
Mix modeler: Helps companies measure, plan, monitor and adjust marketing campaigns
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DISCLAIMER:
We do not give buy and sell recommendations, the value range range given is based on our analysis, but for you to have a good understanding of the business that you read about in this article, you will have to do your own analysis. The value range given in this article does not mean we will buy this stock at this price range.
Buying or selling a stock will always be your own decision and we are not liable for any decisions you make regarding this.
