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Proprietary Data Insights Financial Pros’ Top Business Support Software Stock Searches in the Last Month
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Is it Time to Buy Adobe (ADBE)?
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Few companies adopted AI as quickly as Adobe Systems (ADBE). Rather than going with general-purpose AI to create images, Adobe leveraged the technology to enhance its customers’ experiences and meet their needs. Yet, the company’s latest earnings report shows how even great ideas might have become overhyped. Shares tumbled 13.5% overnight as the company’s guidance didn’t live up to expectations. Yet, the company’s growth is still phenomenal. Does this mismatch create a buying opportunity? Adobe’s Business Adobe is a powerhouse for creative content, design, publishing, and everything in between. You probably know them for the PDF file format. Yet the company is so much more. It’s the go-to choice for professionals such as photographers, graphic designers, video editors, and more. Adobe boasts a robust collection of apps that enable everyone to create and manage documents and projects. Ita business is reported along three business units:
Source: Adobe Q1 2024 Investor Relations Digital Media primarily encompasses Adobe’s Creative Cloud and Document Cloud. Creative Cloud includes tools and services for content creation and design, catering to professionals in photography, video editing, graphic design, and more. Document Cloud offers solutions for creating, editing, sharing, and signing documents digitally.
Source: Adobe Q1 2024 Investor Relations Digital Experience relates to Adobe’s offerings that help businesses manage customer experiences. This includes Adobe Experience Cloud, which provides tools for analytics, marketing, advertising, and commerce. Publishing & Advertising involves solutions that support the creation, delivery, and monetization of content across various channels. This includes Adobe’s publishing tools and advertising platforms within the Experience Cloud suite.
Source: Adobe Q1 2024 Investor Relations Adobe began integrating AI into its platforms as early as 2021. Its generative AI photo editing software received immense praise. Yet, many analysts feel the company is too slow and deliberate in its rollout, given how fast AI is taking and Adobe’s more limited use runway. Financials
Source: Stock Analysis Despite Wall Street’s sour mood, Adobe has done a fantastic job growing sales while investing in the future. Margins have held up nicely, with free cash flow at a whopping 36%, which largely goes to share buybacks that yield about 2.5% annually. Plus the company hardly has any debt on its balance sheet. Valuation
Source: Seeking Alpha The real question is whether shares of Adobe are overvalued. At 44x forward earnings and 29x forward cash flow, it’s not cheap, but it’s not expensive either, especially compared to companies like Salesforce (CRM). Other companies like IBM (IBM) are much cheaper. But they lack growth. Growth
Source: Seeking Alpha As the data above illustrates, Adobe and Salesforce are in a league of their own, though Oracle (ORCL) has recently made headway on sales growth. Interestingly, most have forecasted similar revenue growth next year. Profitability
Source: Seeking Alpha With all of these companies, save IBM, the margins are so high that valuations are closely tied to growth. Adobe has also done a great job of maintaining its profitability. Our Opinion 7/10 We agree with analysts that Adobe’s valuation is stretched. Even with the recent drop, we’d still like to see a further decline of about 25% in shares before it becomes an attractive investment. Until then, it’s a hold for us. |
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