Adobe Will Be A Dinosaur One Day, But Not Today
ADBE just provided the strongest next-quarter guide of any of our covered tech stocks.
DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
FTC 1, Long Term Adobe Shareholders 0
Adobe ( ADBE 0.00%↑ ) is, as you know, a company as old as a field. Founded in 1982, the company’s story is remarkable, and it’s worth reading up if it’s unfamiliar. The Wikipedia page isn’t a bad place to start. What has kept Adobe up with the best is its ability to constantly reinvent itself. From embracing digital content early on (in spite of being a company borne of printing) to moving to a subscription model in good time, the company has staved off dinosaur status far longer than one might expect of a now 41 year old business. If only ORCL 0.00%↑ could say the same.
The recently announced $20bn acquisition by Adobe of the minnow Figma was a case in point. The price makes no sense at all as a multiple of anything. Except as a multiple of the revenue and earnings that Adobe stands to lose if Figma and other deflationary competitors succeed in hacking away at the underpinnings of Adobe’s market share. Figma is worth $20bn in the same way that Instagram was worth $1bn or WhatsApp was worth $19bn; it’s the price of not being a dinosaur (which brings with it multiple compression, earnings decay and general atrophy until you get acquired by a local Barbarian At The Gate, whereupon your innards may further be gutted for prize organs).
Regulators know this of course which is why they have been lobbing fireballs at the deal. The stock seems to have shrugged this off, as if ‘overpaying’ for a deflationary competitor - a potential future existential threat at least to your earnings multiple - is a purely bad thing. It is not. The potential nixing of the ADBE / Figma deal is a bad thing long term for ADBE in our view. The price of ADBE buying a major deflator is huge but the logic is sound - contain the threat before it starts undermining too much high-margin revenue. Short term the stock can benefit from not having to hand over all the money; long term, Adobe is a dinosaur egg waiting to hatch. Whereupon it is only a matter of time before it is out-evolved.
For now though, fundamentals are rock solid and the technical setup for the stock is bullish. We rate at Hold because we set a tight Accumulation range when the stock dumped recently - that has proven wise - but there's material upside from here in our opinion if you are less fussy on entry price.
The company reported its Q1 of FY11/23 earnings yesterday - we report on those below for our Premium and Pro members. We include fundamental analysis, technical analysis, medium term price targets and risk management ideas.
If you’re not yet a Premium or Pro member, you can sign up right here.