Adobe Continues To Surprise To The Upside
Up 57% YTD - We Think There Could Be Plenty More To Come
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An Oldie But Still, It Seems, A Goldie
by Alex King
Adobe ADBE 0.00%↑ ‘s great skill as a company has been to dodge the bullets that normally prove fatal to tech companies, namely, paradigm shifts.
Founded in 1982, the company first garnered success when print media was the only game in town. From PostScript to PageMaker (which came with their 1994 acquisition of Aldus Corp), Adobe eventually became the dominant player in desktop publishing, chipping away gradually at the initial market share gains achieved by Quark .
Along comes the Internet and with it, Macromedia and other digital content players are the new kids on the block. Over time Adobe also acquired its way into this sector, paying $3.4bn for its potential nemesis in 2005.
Portable Document Format (PDF) technology has moved from being a way to swap documents between computers running different operating systems - Macs and PCs principally - to an accepted electronic publishing standard which now includes e-signature capability and which has designs on Docusign’s market share in contracting.
It is exceptionally rare to see a technology company continually re-invent itself in this way, even more so by paying big bucks to acquire small companies threatening to chip away at the incumbent’s market share. Normally companies like Adobe die slowly as a result of arrogance and laziness, and end up as yield plays for value shareholders content to milk the cashflow margins until that game too is up.
But here we have a company prepared to pay $20bn for Figma, a business with more or less no revenue, because they perceive it to be a threat to their incumbency. This deal may well fail on antitrust grounds but either which way the desire of Adobe to buy it should be lauded by Adobe shareholders. Another bullet the company is trying to dodge.
The stock has been on fire this year, after taking a beating late in 2022 because shareholders (wrongly in our view) took against the Figma deal. In 2023 the name is up 57% vs. 40% for the Nasdaq and 17% for the S&P500, all on a total return basis.
The company printed its Q3 of FY11/23 earnings recently. We now take a look at that strong quarterly performance, assess valuation, and set out our view of where the stock may move to in the short- and medium term.