Stock Spotlight

At Adobe, software makes hard cash

 

Software designer Adobe ($370; ADBE) seems well-positioned for the continuing shift toward a digital world. The shares have rallied 3% in 2023. We see room for Adobe to run higher, given the company’s steady operating momentum, upbeat growth prospects, and decent valuation. Adobe is rated Buy.

Adobe designs software, such as its popular Photoshop, Illustrator, and Acrobat, geared toward creating and promoting online content. Adobe has also expanded into marketing services, allowing companies to manage, measure, and monetize everything from online advertising to commerce. Adobe continues to shift toward a subscription-based model, reducing up-front costs for customers and piracy risks for the company.

For the 12 months ended February, Adobe grew per-share profits 11%, revenue 12%, operating cash flow 7%, and free cash flow 7% to $7.32 billion. Operating momentum has been remarkably steady, with both earnings per share and sales growing more than 5% in 33 consecutive quarters. That trend appears likely to carry through 2023 and into 2024.

Stock buybacks have shaved 3% from Adobe’s share count in the past year, 8% over the past five years, and 9.5% over the past decade. Management expects to repurchase an additional 1% of shares by the end of November.

For now, Adobe has also let some of its excess cash build on the balance sheet. Net cash per share totaled $3.32 at the end of February, up from $0.08 for the same time last year. Adobe says it has no plans to institute a cash dividend.

In September, Adobe agreed to pay about $20 billion to acquire Figma, which provides cloud-based collaboration tools to software developers. The cash-and-stock deal would be Adobe’s biggest in its history. But the pending takeover has attracted close scrutiny from antitrust regulators in the U.S. and Europe. Published reports in February said the Department of Justice was preparing to block the deal, and in May the U.K. said it would investigate the deal.

Over the past six years, Adobe has spent $9.44 billion on six acquisitions that expanded its presence in a broad range of platforms, including video collaboration, workflow, commerce, video ads, marketing cloud, and editing.

Conclusion

Adobe’s shares won’t be confused for cheap, as reflected by a middling Value score of 44. But at 24 times trailing earnings, the stock trades below the S&P 1500 application software industry’s median of 30 and its own five-year norm of 37. Shares trade at 22 times estimated current year profits, a 19% discount to the industry.

Over the past 60 days, analyst profit and sales estimates have climbed for the May, August, November, and February quarters — with growth for each quarter coming in a tight range of 11% to 14% for earnings and 8% to 11% for revenue. Management has topped the consensus profit estimate in 17 straight quarters, which boosts our confidence that the company can meet or exceed expectations.

Adobe Inc., 345 Park Ave., San Jose, CA 95110- 2704, (408) 536-6000; adobe.com.

 

 

 

 

Quadrix Scores

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.