We came across a bullish thesis on Adobe Inc. (ADBE) on Rijnberk InvestInsights’ Substack by Daan Rijnberk. In this article, we will summarize the bulls’ thesis on ADBE. ADBE Technologies, Inc. share was trading at $522.30 as of Sept 20th. ADBE’s trailing and forward P/E were 44.21 and 25.32 according to Yahoo Finance.
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Adobe is a global leader in the digital media and creative software market. It dominates various industries such as graphic designing, video editing, photography, and web development through its comprehensive portfolio of tools like Photoshop, Illustrator, Premiere Pro, and Acrobat. Adobe is highly regarded as a brand and it is ranked as the 14th most valuable globally by Interbrand, with a value of $35 billion. Adobe as a company today holds a huge market share of over 80% in the graphic design industry due to its years of product development.
Adobe as the company has been continuously investing in R&D to expand its software capabilities, in the most recent quarter the company increased its investments by 16% YoY to bolster its innovation as the rise of AI-powered tools, such as image generators are a potential threat as they could replace Adobe’s software due to their cheaper offerings and faster alternatives but as these AI tools still cannot offer precession and complex capabilities professionals will still prefer Adobe’s software.
Adobe’s Creative Cloud service generates a recurring subscription revenue stream which can be considered as high quality. In Q3, Adobe reported strong financial performance slightly exceeding expectations where its revenue grew 11% year-over-year (YoY) to $5.41 billion. The Digital Media segment of Adobe saw robust performance as it grew by 12% YoY to $4 billion, with its net new Digital Media annual recurring revenue (ARR) of $504 million mainly contributed by Creative and Document Cloud. The Digital Experience segment also increased 12% YoY, reaching $1.35 billion. Adobe’s operating margin grew by 40 basis points resulting in $2 billion of operating income. Earnings per share (EPS) rose 14% YoY to $4.65.
With a strong credit rating of A+ Adobe has $7.52 billion in cash against $4.13 billion in long-term debt, with over $7 billion in annual free cash flow (FCF). The company through its share repurchase program of $25 billion which will continue till 2028 has reduced 10% of its outstanding shares.
The global graphic design software market’s expected 10% compound annual growth rate (CAGR) through 2030 is expected to benefit Adobe. The AI integration that has been happening could fuel future growth as Adobe is estimating a 12% CAGR making its total addressable market $293 billion by 2027. Adobe shares are trading at 28x FY24 earnings and 25x FY25 earnings thus pricing them at a 30% discount to its five-year average. With a target price of $675 by FY26, Adobe is an attractive investment opportunity that offers long-term investors potential annual returns of 13%. Despite the near-term concerns over slowing growth, Adobe’s financial health and market dominance position it well for future success.
Adobe Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 14 hedge fund portfolios held ADBE at the end of the second quarter which was 17 in the previous quarter. While we acknowledge the risk and potential of ADBE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.