Adobe Inc. (ADBE)
Current Price (as of 5/3/2024): $486.18
Business
What does a Hollywood film, a podcast, a billboard, and a Portable Document Format (PDF) file have in common? They were all made with Adobe products. Adobe Inc. (ADBE) is the market leader for creativity, marketing, and PDF editing software solutions used by businesses, professionals, and amateurs worldwide. ADBE’s products are widely used in various industries, including advertising, publishing, multimedia, entertainment, education, and more.
ADBE's business consists of three reportable segments comprising Digital Media, Digital Experience, and Publishing and Advertising. The Digital Media segment constitutes 75.68% of total revenue and is centered around the company's SaaS offerings or subscription services, such as Adobe Creative Cloud and Adobe Document Cloud. Adobe Creative Cloud includes Adobe Photoshop, a graphics editor used for image editing, graphic design, and digital art; Adobe Premiere Pro, a video editing software used for producing professional quality videos; Adobe Express, an AI and template first, task-based web and mobile app; Adobe Firefly, an AI tool that generates images and effects from text commands; and many more products. Furthermore, Adobe Document Cloud is a cloud-based document services platform that integrates ADBE's pioneering PDF technology with its Acrobat and Acrobat Sign apps. These PDF and electronic signature solutions are used by individuals, small and medium businesses, large enterprises, and government institutions around the world.
The Digital Experience segment makes up 23.68% of revenue and comprises of marketing software solutions for enterprises. This segment provides enterprises with a 360-degree view of their customers and their preferences, allowing enterprises to provide a positive customer experience or CX. Customer experience or CX refers to the overall perception or feeling a customer has about a brand or business based on their interactions and experiences throughout the entire customer journey. ADBE helps enterprises provide positive customer experiences through its AI-driven analytics, content optimization, advertising, commerce, marketing, and customer journey management solutions. This segment also helps enterprises to evaluate how their digital marketing campaigns are performing and aims to help enterprises execute them successfully. Target customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, and executives.
The Publishing and Advertising segment accounts for 0.64% of revenue and contains legacy products and services that include eLearning solutions, technical document publishing, web conferencing, document and forms platform, web app development, high-end printing, and Adobe Advertising offerings.
Positive Outlooks
- Adobe Inc. is the market leader for creativity and PDF editing software solutions. In fact, 90% of creative professionals use Adobe Photoshop, which is included with Adobe Creative Cloud, making it an industry standard in the creative field. ADBE’s strong positioning power makes it very difficult for its customers to opt for alternative solutions, as doing so would make their creative work incompatible with Adobe’s software. Furthermore, Adobe created the PDF file format and its supported software, Acrobat, which allows users to read and edit PDFs. Adobe Acrobat has been adopted by millions of individuals and thousands of businesses globally, and I believe there is no competing format that matches the ubiquity and versatility of the PDF.
- ADBE offers marketing services for enterprises through its Digital Experience segment, which should fuel growth in years to come. The Digital Experience segment operates in a young, yet highly competitive landscape, and Adobe is emerging as a leader. Industry analysts have crowned Adobe as a leader in digital experience platforms, B2B marketing automation platforms, enterprise marketing suites, content management systems, customer analytics, digital commerce, and more. For example, Adobe was named a seventh-time Leader in the 2023 Gartner® Magic Quadrant™ for Digital Commerce and is said to hold 37.16% of the market share in the digital-marketing-services industry. Moreover, ADBE's Experience Cloud, which integrates analytics, marketing, and commerce tools within a single platform, presents a compelling option for enterprises already utilizing ADBE’s Creative Cloud and Document Cloud software solutions. Consolidating vendors to a single company like ADBE can simplify business operations.
- Artificial Intelligence should accelerate growth, as it becomes more widely adopted by businesses, governments, and individuals alike. For example, the AI Assistant for Acrobat will allow users to ask for a summary or the key takeaways of a PDF document they are viewing, which can be used as bullet points in a presentation for a meeting. It will also provide quick answers to questions users have regarding the material within a PDF document. On the creative side, ADBE debuted Firefly in 2023, its generative AI offering that converts text commands into life like images and font effects, removes unwanted objects from an image, and can even add objects to an image. AI is essentially making ADBE’s products more powerful, easier to use, and more accessible to the average user.
Positive Outlooks (Continued)
- ADBE generates $20 billion in annual revenue but anticipates that its total addressable market will reach $293 billion by 2027, presenting a significant opportunity for growth. To fuel this expansion, ADBE holds $7.14 billion in cash and equivalents and generates billions of dollars in free cash flow annually, which can be used for strategic acquisitions. For instance, Adobe has strategically acquired companies to enhance its Digital Marketing suite within the Digital Experience segment. Acquisitions such as Marketo (2018) and Magento (2018) complement Adobe's existing portfolio. Additionally, notable acquisitions like Adobe Experience Manager (2010) and Adobe Analytics (2009) have significantly strengthened Adobe's offerings.
Negative Outlooks/Risks
- ADBE's stock is down 23.41% from its February high of $634.76. The decline in ADBE’s stock price can be attributed to concerns that generative AI offered by competitors will rival ADBE Firefly. For example, OpenAI, the creator of ChatGPT, recently unveiled a new text-to-video generator called Sora. This announcement caused ADBE shares to plunge 7.4% in one day. Nonetheless, ADBE’s creative products are industry standard. When generative AI is incorporated into ADBE’s creative solutions, it creates extremely powerful software that will likely make ADBE users reluctant to switch.
- Any decline in subscribers to Adobe Creative Cloud and Acrobat software solutions would negatively impact sales and margins. Over 70% of revenue is generated from the Digital Media segment, which is largely driven by Adobe Creative Cloud and Acrobat software solutions. While unlikely, any new competitive platforms widely adopted by consumers would represent a major blow to ADBE’s top and bottom lines.
- ADBE pays billions of dollars for the companies it acquires, and underperformance of those investments could result in the reduction or impairment to the value of ADBE’s $12.81 billion in goodwill. Since 2018, ADBE has paid $1.2 billion to $4.75 billion for its acquisitions.
Financial Results and Outlook
Revenues for the first quarter of fiscal 2024, ended on 3/1/2024, came in at $5.18 billion, growing 11% year-over-year (YoY). This exceeded the top end of management’s guidance of $5.15 billion. More specifically, the Digital Media segment drove in $3.82 billion in sales, which represented 12% YoY growth, and the Digital Experience segment sales were $1.29 billion, representing 10% YoY growth. Diluted earnings per share was $4.48 on a non-GAAP basis, beating the high end of guidance by $0.08.
Management projects total revenue for the second quarter of FY24 to range from $5.25 billion to $5.30 billion. Digital Media segment revenues are forecasted to land within the range of $3.87 billion to $3.90 billion, and Digital Experience segment revenues are guided in the range of $1.31 billion to $1.33 billion. Diluted earnings per on a non-GAAP basis is forecasted to range from $4.35 to $4.40.
Valuation
ADBE stock has declined 16.19% year to date, lagging the S&P 500, which is up 8.12%. The company’s forward GAAP P/E ratio of 40.18x exceeds the IT sector median of 28.09x. This indicates that investors are paying 43.02% more for each dollar of annual earnings of ADBE stock compared to the IT sector median.
Furthermore, ADBE’s Forward Non-GAAP PEG (Price/Earnings to Growth) ratio of 1.60 suggests that the stock is trading at a slight premium to its earnings per share growth rate. However, according to ADBE’s FWD PEG ratio, investors buying ADBE are paying less per unit of earnings growth compared to the IT sector median FWD PEG ratio of 1.84.
ADBE’s forward Price/Book ratio of 13.33 is 251.54% higher than the IT sector median of 3.79, suggesting that investors have high expectations for ADBE stock because they think it will earn and grow more in the future. Lastly, ADBE’s forward price-to-sales ratio of 9.95 is 269.03% higher than the IT sector median of 2.70, implying that investors are paying $9.95 for every one dollar of ADBE’s sales.