Adobe Inc. (ADBE)

Adobe Inc. (ADBE)

Summary:  On Sale

Score:  18/20

MOS:  80%

Share Price:  $640

Sticker Price:  $3,218

Is Adobe stock a good buy?

The previous Tykr review on Adobe was completed on June 17th, 2020. At that time the summary was as follows:

Summary:  On Sale

Score:  18/20

MOS:  70%

Share Price:  $430

Sticker Price:  $1,484

This shows the share price has increased by 48% over the last 15 months. What is important to look at is the sticker price. Due to the steady growth of the EPS, the sticker price (real value of the stock) has substantially increased. We’ll break down the EPS growth rate later in this article but overall, Adobe continues to show great financials and the share price increase of 48% is a reflection of those great financials. 

Now let’s take a look at the company.

Adobe is a software company founded by John Warnock and Charles Geschke in 1982 and based in San Jose, CA. The company has office locations in the US, China, India, Japan, Taiwan, Hong Kong, Korea, Singapore, Australia, Belgium, Ireland, Netherlands, Sweden, Denmark, Poland, Italy, France, UK, Spain, South Africa, Brazil, and more.

Before we dive further into the business, here are some fun facts on Adobe.

  • The company is named after the Adobe Creek in Los Altos, CA.
  • John Warnock’s wife, Marva Warnock, designed the Adobe logo.
  • Their first product was Adobe PostScript which was a printer software.
  • Steve Jobs attempted to buy Adobe for $5M in 1982 but Warnock and Geschke declined. Their investors urged them to work something out with Jobs, so they agreed to sell him shares worth 19 percent of the company. Jobs paid a five-times multiple of their company’s valuation at the time, plus a five-year license fee for PostScript, in advance. This purchase made Adobe the first company in the history of Silicon Valley to become profitable in its first year.
  • Illustrator was created in the mid-1980s.
  • Photoshop was created in 1989.
  • Premiere was created in 1991.
  • PDF was created in 1993.
  • In 2010 Adobe argued with Steve Jobs over the use of Flash. Steve insisted that Flash was not reliable or secure which prevented flash from working on IOS devices.  Eventually, Adobe discontinued development of Flash in 2011 and was replaced by HTML 5.

Adobe has made a few acquisitions through the years to maintain a strong competitive advantage or otherwise known as a wide moat.

  • Macromedia in 2005. This added ColdFusion, Contribute, Dreamweaver, Flash, Flex, Presenter, and more to the arsenal of Adobe tools.
  • Omniture in 2009. This added marketing tools such as SiteCatalyst, Discover, Insight, Survey, and more.
  • DemDex in 2011. This added an audience optimization tool.
  • Nitobi in 2011. This added a mobile development application.
  • Marketo in 2018. This added marketing automation.
  • Allegorithmic in 2019. This added a 3D texturing application.
  • Workfront in 2020. This added a marketing collaboration application.

In 2013 Adobe made a smart business move that many other businesses can learn from. They changed their product from a physical CD one-time / lifetime purchase to an online subscription. In other words, they turned into a SaaS (Software as a Service). Adobe Cloud was created, which is a low cost online subscription service that allows customers to download and use whatever Adobe software applications they want. Guess what happened to the share price? Yes, it took off like a rocket.

  • 2013 Share Price:  $43
  • 2016 Share Price:  $100
  • 2018 Share Price:  $245
  • 2021 Share Price:  $640

Although Adobe is known for popular B2C (Business to Consumer) tools such as Photoshop, Illustrator, Premiere, and PDF, they have also created some impressive B2B (Business to Business) enterprise tools such as AEM (Adobe Experience Manager) and Adobe Analytics.

AEM is a powerful website application. Small businesses will use platforms such as WordPress, Squarespace, Wix, and Shopify but large businesses use AEM. The price tag on AEM can cost hundreds of thousands of dollars if not millions of dollars per year. The costs are based on a number of factors such as number of pages, number of products sold, number of images, etc.  Those of you who know me, know that I love enterprise software. Typically, when a large business signs an enterprise contract, they are not “giving it a try” for a month or two. Contracts can be signed and committed to for 7 – 10 years. That means Adobe is generating a significant amount of cash flow for a predictable time into the future. It’s a brilliant revenue model.

Adobe Analytics is another powerful enterprise tool that allows businesses to view website analytics, marketing analytics, and predictive analytics. This tool can also cost hundreds of thousands of dollars on up to millions of dollars per year.

Here is what the news has to say.

This article from cnbc.com states that Alchemy, a tech startup that allows developers to create their own block chain apps, is creating a strategic partnership with Adobe. Alchemy will allow Adobe to give artists the ability to create NFTs (nonfungible tokens) in Photoshop. This partnership will attract new customers to use Photoshop, which generates more revenue for Adobe.

This article from zacks.com is titled “New to Investing? This 1 computer and technology stock could be the perfect starting point.” This article is specifically referencing Adobe because of the strong financial statements and continuous growth.

This video from cnbc.com includes an interview with Adobe CEO, Shantanu Narayen, where he talks about Adobe products moving to the web which means multiple designers can be working on the same Photoshop file at the exact same time. This type of advancement will allow projects to be completed significantly faster. 

This video from cnbc.com includes an interview with Jim Cramer and Shantanu Narayen where Cramer asks how Adobe is able to secure clients like Walmart, PayPal, Nike, Facebook, Ford, CVS, and More. Narayen responds by saying their product line’s maturity and availability allows large companies to use just a few necessary products at first but then scale up from there as needed.

This article from benzinga.com emphasizes that flagship Adobe products such as Photoshop and Lightroom do not have competitors in the market. This further emphasizes the wide moat.

Speaking of competitors, let’s have a closer look at the various Adobe product lines.

  • With Photoshop, Lightroom, Illustrator, InDesign there are no competitors.  If you are a design professional, Adobe products are it. This means that every freelance designer, every marketing firm or advertising agency, and every large corporation with an internal marketing department are paying subscriptions for these Adobe products.
  • With video editing, Premiere and After Effects have surpassed Apple’s Final Cut Pro as the top selling platform.
  • With AEM, I found a few sites that listed Squarespace, WordPress, and Wix as potential competitors. These platforms are more suitable for small and midsize businesses, not enterprise businesses. Some of the companies that use AEM include Microsoft, Dell, Craftsman, Deloitte, Garmin, Hyatt, Motorola, Morningstar, Mastercard, Philips, Sony, Synopsys, T-Mobile, and UBS.
  • With Analytics, some of the competitors include Google Analytics, Amplitude Analytics, Twilio Segment, Hotjar, and Chartbeat. Although these are all great products, they are more stand along analytical products whereas Adobe Analytics is heavily integrated with the AEM platform. 

Although Adobe doesn’t have a lot of competition with the design products, let’s see how Adobe stacks up against the competition on other products.

Adobe (ADBE)

Summary:  On Sale

Score:  18/20

MOS:  80%

Share Price:  $640

Sticker Price:  $3,218

 

Apple (AAPL)

Product Line: Video editing with Final Cut Pro is a competitive product to Adobe Premiere. 

Summary:  Watch

Score:  16/20

MOS:  45%

Share Price:  $150

Sticker Price:  $270

 

Wix (WIX)

Product Line: Wix website builder is a competitive product to Adobe AEM but Wix is more suitable for small and midsize businesses.

Summary:  Overpriced

Score:  8/20

MOS:  1%

Share Price:  $184

Sticker Price:  $186

 

Alphabet (GOOGL)

Product Line: Google Analytics is free and Google Analytics 360 is a paid version which is competitive to Adobe Analytics.

Summary:  Overpriced

Score:  20/20

MOS:  80%

Share Price:  $2,908

Sticker Price:  $14,620

 

Now let’s take a look at the 4 M’s. A wise investor should always look past the numbers and look at the business.

MOS: The financials are very strong. When you look at the calculations tab in Tykr, you can see the ROIC is 6/6, the Equity Growth Rate is 3/3, the Cash Growth Rate is 3/3, and the Payback Time is 1/1. The EPS Growth Rate and Sales Growth Rate are both 2 out of 3 which is good but shows there is slight room for improvement. A score of 18/20 is nearly perfect and the MOS of 80% shows this stock has a lot of room to grow.

Meaning: Adobe has both B2C and B2B SaaS revenue streams that support the design, marketing, and advertising industries. In other words, as long as companies will market and sell products and services, a company like Adobe will be needed. Adobe will most definitely be around for more than 10 years.

Moat: As outlined above, there aren’t a lot of competitors. Yes, some product lines like Adobe Premiere and Adobe Analytics may have some competitors but the entire company on its own stands apart. The addition of AEM which primarily serves enterprise customers was a big win for Adobe. This has allowed the company to secure highly lucrative long-term contracts.

Management: Shantanu Narayen has served as CEO of Adobe since 2007. He started his career in 1986 at a company called Measurex Automation Systems, which made computer control systems for automotive and electronics customers. Thereafter he went to Apple and worked in senior management positions from 1989 to 1995. He joined Adobe in 1998 as senior vice-president of worldwide product development and held the position through 2001. From 2001 – 2005 he served as executive vice-president of worldwide products. From 2005 – 2007 he served as COO before stepping into the role as CEO. Narayen was a key driver in turning Adobe into a SaaS company. Overall, he has excellent leadership experience that makes him a perfect fit for CEO.

 

Now let’s take a look at the financials. A wise investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

Revenue (Found on the Income Statement)

2017:  $7.3B

2018:  $9B

2019:  $11B

2020:  $12B

Revenue has consistently increased year over year which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $1.6B

2018:  $2.5B

2019:  $2.9B

2020:  $5.2B

Net Income has increased year over year but the jump in 2020 was quite impressive. This is a great sign.

 

EPS (Found on the Income Statement)

2017:  3.38

2018:  5.28

2019:  6

2020:  10.94

EPS has consistently increased year over year which is a great sign but the EPS jump in 2020 is the most impressive improvement. This is why the sticker price has increased to $3,218.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $2.7B

2018:  $3.7B

2019:  $4B

2020:  $5.3B

Free Cash Flow has consistently increased which is a great sign.

 

Total Assets (Found on the Balance Sheet)

2017:  $14.5B

2018:  $18.7B

2019:  $20.7B

2020:  $24.2B

Total Assets have consistently increased which is a great sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $6B

2018:  $9.4B

2019:  $10.2B

2020:  $11B

Total Liabilities have increased which is okay. As companies grow, they need to hire more employees. More employees means more liabilities.

 

Total Debt (Found on the Balance Sheet)

2017:  $1.8B

2018:  $4.1B

2019:  $4.1B

2020:  $4.7B

Total Debt has increased which is okay. Debts may come in the form of bank loans which are a quick way to obtain capital needed to pay employees. As long as debts are not increasing as fast as the revenues and net income, that’s a good sign.

 

Total Equity (Found on the Balance Sheet)

2017:  $8.4B

2018:  $9.3B

2019:  $10.5B

2020:  $13.2B

Total Equity has increased which is another great sign.

Adobe is an impressive company. They have continuously innovated over the years. The big milestones included the shift to a SaaS model and the addition of enterprise products including AEM and Adobe Analytics. It’s exciting to see Adobe products including Photoshop will soon move to the web which allows multiple designers to work on the same project at the same time. With the MOS, Adobe is nearly perfect with a score of 18/20 and MOS of 80%. With the Meaning, the combination of B2C and B2B SaaS products have created a variety of healthy revenue streams. The moat is probably the most impressive part of the company as they don’t have a lot of competition. As mentioned earlier, some products may overlap with other companies but this company stands alone. With the management, Narayen has done an impressive job leading this company. Based on his past experience, he’s highly focused on innovation. 

If you like tech companies with a wide range of revenue channels, then Adobe is work a look.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.