Case Study on Adobe (ADBE) with Nobias technology
Summary
ADBE posted mixed results on Thursday morning when it reported fiscal Q3 earnings data.
The company also announced its $20 billion acquisition of Figma during the quarterly release.
ADBE shares fell by nearly 17% during the trading session on Thursday, pushing their year-to-date returns down to -45.23%.
However, credible analysts believe that this weakness has gone too far, with an average price target on ADBE shares which calls for 43.4% upside.
Adobe reported fiscal Q3 earnings on Thursday before the market opened. The company missed analyst consensus estimates by $10 million on the top-line, posting $4.43 billion in sales. ADBE beat Wall Street’s expectations on the bottom-line by $0.06 with non-GAAP earnings-per-share of $3.40. The stock opened the trading session down roughly 13%. By the time the market closed on Thursday, shares had fallen by 16.79%. And yet, it appears that this sell-off wasn’t based upon the company’s fundamental results, but instead, a large acquisition that management announced alongside the earnings data.
Patrick Seitz, a Nobias 5-star rated author, covered ADBE’s earnings report in an article published at IDB. Regarding the company’s quarter, Seitz wrote, “The San Jose, Calif.-based company [referring to Adobe] earned an adjusted $3.40 a share on sales of $4.43 billion in the quarter ended Sept. 2. Analysts polled by FactSet expected Adobe earnings of $3.35 a share on sales of $4.44 billion. On a year-over-year basis, Adobe earnings rose 9% while sales increased 13%.”
Seitz also touched upon forward guidance, stating, “For the current quarter, Adobe forecast adjusted earnings of $3.50 a share on sales of $4.52 billion. Analysts were looking for earnings of $3.47 a share on sales of $4.6 billion in the fiscal fourth quarter. In the year-earlier period, Adobe earned $3.20 a share on sales of $4.11 billion.”
ADBE Sep 2022
Seitz quoted ABDE’s management team, writing: "Fueled by our groundbreaking technology, track record of creating and leading categories and consistent execution, Adobe delivered another record quarter," Chief Executive Shantanu Narayen said in a news release. "With the announcement of our intent to acquire Figma, we believe we have a unique opportunity to usher in a new era of collaborative creativity."
Regarding the M&A that shook the stock, Seitz said, “announced a deal to acquire Figma, a web-first collaborative design platform, for about $20 billion.” He continued, “Figma expects to double its annualized recurring revenue this year to over $400 million. Figma has positive operating cash flows and gross margins of about 90%, according to a news release.”
Seitz highlighted the size of this deal, writing, “The Figma deal is Adobe's biggest acquisition ever. It is four times larger than the $4.75 billion it paid for Marketo in October 2018.” And, he concluded, it was the price that Adobe paid for the Figma assets that sparked the negative sentiment surrounding shares. Seitz quoted Brett Thill of Jefferies, a Nobias 4-star rated analyst, who said that the Figma deal “looks pricey” in an analyst note.
Thill continued, "While Figma may prove transformative as in past deals (e.g., Macromedia), payback period is years out on a record investment.” Ultimately, in response to ADBE’s Q3 results, Thill cut his price target for Adobe from $475.00 to $440.00/share.
Seitz noted that ADBE’s CEO, Dan Durn, told IBD that the combined company’s assets will lead to a "new era of creative productivity.” Durn went on to say that, "This is a game-changing transaction for us." However, Seitz cited a report from Scott Kessler, an analyst from Third Bridge, who believes there could be regulatory headwinds associated with this deal.
Nickie Louise, a Nobias 4-star rated author, also covered the Figma deal in an article published at techstartups.com. Louise highlighted Figma’s operations, stating, “Founded in 2012 by Dylan Field and Evan Wallace, San Francisco-based Figma is a design platform for teams who build products together. Born in the browser, Figma helps the entire product team create, test, and ship better designs, faster.”
Louise also wrote, “Figma allows collaborators to work on designs and brainstorm in the same online space. Its customers include companies such as Zoom Video Communications, Airbnb, and Coinbase among its customers.”
Trapping Value, a Nobias 4-star rated author, also wrote about ADBE’s sell-off in a report published at Seeking Alpha, ultimately offering a bearish conclusion. Trapping Value said, “At first glance the results were not too bad.” They continued, “The $3.23B in revenue for the Digital Media division was a13% increase over the prior year or a 16% increase in constant currency. Creative revenue was up about 14% in constant currency. Document Cloud was the star with a 25% in constant currency growth.”
However, the author noted that increased capex and share count dilution hurt ADBE’s bottom-line growth, writing, “The impact was so bad that GAAP earnings were down 5% year over year ($2.42 vs $2.52) per share. This is despite a monumental effort by the company to reduce shares outstanding.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Admittedly, Trapping Value was looking at GAAP EPS instead of non-GAAP, but the author defended that decision, writing, “We have all been brainwashed into looking for the Non-GAAP number, so yes that one was up. That would be like your doctor telling you that your cardiac health was up if we adjusted for the fact that you ate enough steak to put cows on the endangered species list. So if we ignore the 79 cents of stock based compensation in the quarter, we did get growth.”
Regarding the Figma purchase and the high price that Thill noted, Trapping Value said, “ADBE just paid 50X sales at the worst possible time.” The author based their bearish opinion of ADBE’s on the company’s valuation, largely focused on the stock’s price-to-sales ratio. They said, “That drop from 13X to 9X revenues was 50% of the journey.”
Ultimately, Trapping Value concluded, “So we are halfway there, and Adobe is still livin' on a prayer.” 52% of recent articles published by the credible authors that the Nobias algorithm tracks have expressed a “Neutral” rating on ADBE, so there definitely isn’t a lot of enthusiasm about the stock from that community. However, looking at the opinions expressed by the credible Wall Street analysts that Nobias tracks, the sentiment is decidedly bullish. Right now, 8 out of the 11 credible analysts that Nobias tracks believe that ABDE shares will rise in value. Currently, the average price target that this cohort is applying to ADBE shares is $443.36. Adobe closed the trading session on Thursday at $309.13. Therefore, that $443.36 average credible analyst price target implies upside potential of 43.4%.
Disclosure: Nicholas Ward is long ADBE. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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