Should you buy Adobe stock? #shorts

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In mid September, Adobe announced it was buying design software Figma for $20 billion.

Adobe’s market cap subsequently fell around $34 billion and has barely recovered since.

Paying 50 times annual revenue for Figma was not well received by the market and a soft earnings report compounded Adobe’s woes.

That leaves the company with an enterprise value around $138 billion right now with 3.9 billion of cash and 5 billion of debt on the balance sheet. That’s before the acquisition of Figma.

Over the last 12 months, the company has made $17.2 billion in revenues, with 4.8 billion in net income and 5.9 billion in free cash flow.

That gives the company a valuation of roughly 8 times revenue and 29 times net income.

If we look at a historical chart the stock price trades at 2019 levels but EV to revenue and EV to ebitda are both at their lowest since 2013.

Historically, Adobe has been an excellent compounder. Gross margins continue to hover around 88% and over the past 10 years, the company has grown earnings around 16% per year.

However, recent management decisions have been more questionable. During 2021 to 22 Adobe spent $7.5 billion repurchasing stock at an average price of $583, then issued $10 billion worth of stock at $378. Capital allocation for a mature business is paramount and these moves were poorly timed.

The Figma deal also highlights the threat of competition. The reason why Canva and Figma are so popular they’re not just cheaper, they're much easier to use. Adobe is concerned about becoming irrelevant.

In that context, paying $20 billion for Figma could prove to be a smart move. It removes a major competitor and strengthens Adobe’s design ecosystem.

Currently, a basic discount cash flow model, which accounts for dilution from the deal, suggests Adobe at $300 is pricing in around 9% cash flow growth for a decade, with a 2% terminal rate.

Adobe has done better than that looking backward, and if the Figma deal works it likely will do so going forward as well.

More simply, if Adobe grows earnings 15% a year then trades at 20 times those earnings in 10 years time, the investment return works out to around 15% per annum.

Overall, Adobe products are still in high demand, particularly with the rise of online content creators. But cheaper tools are also plentiful and they do pose a threat.

Adobe stock could once again prove to be a good investment but the current valuation doesn’t leave much margin for error.

That’s why I give the stock a neutral rating and I plan to revisit the stock if the price moves lower.

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