Software Stocks

Adobe Systems Inc Valuation – April 2018 $ADBE

Company Profile (excerpt from Reuters): Adobe Systems Incorporated, incorporated on May 9, 1997, is a software company. The Company offers a line of products and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. The Company operates through three segments: Digital Media, Digital Marketing, and Print and Publishing. The Company markets and licenses its products and services directly to enterprise customers through its sales force and to end users through application stores and its own Website at www.adobe.com. It offers various products through a software-as-a-service (SaaS) model or a managed services model (both of which are referred to as a hosted or cloud-based model), as well as through term subscription and pay-per-use models.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ADBE – April 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $105,284,567,394 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.12 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 210.13% Pass
6. Moderate PEmg Ratio PEmg < 20 59.96 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 12.65 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.12 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.48 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.65
MG Growth Estimate 15.00%
MG Value $140.37
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $52.87
MG Value based on 0% Growth $30.99
Market Implied Growth Rate 25.73%
Current Price $218.61
% of Intrinsic Value 155.74%

Adobe Systems Incorporated is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the lack of dividends. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.98 in 2014 to an estimated $3.65 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 25.73% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Adobe Systems Incorporated revealed the company was trading above its Graham Number of $49.09. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 59.96, which was above the industry average of 49.59. Finally, the company was trading above its Net Current Asset Value (NCAV) of $2.29.

Adobe Systems Incorporated receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $2.29
Graham Number $49.09
PEmg 59.96
Current Ratio 2.12
PB Ratio 12.65
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 2/1/2018
Total Current Assets $7,480,814,000
Total Current Liabilities $3,536,469,000
Long-Term Debt $1,874,794,000
Total Assets $14,973,485,000
Intangible Assets $6,197,639,000
Total Liabilities $6,339,457,000
Shares Outstanding (Diluted Average) 499,433,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.24
Nov2017 $3.38
Nov2016 $2.32
Nov2015 $1.24
Nov2014 $0.53
Nov2013 $0.56
Nov2012 $1.66
Nov2011 $1.65
Nov2010 $1.47
Nov2009 $0.73
Nov2008 $1.59
Nov2007 $1.21
Nov2006 $0.83
Nov2005 $1.19
Nov2004 $0.91
Nov2003 $0.55
Nov2002 $0.40
Nov2001 $0.42
Nov2000 $0.57
Nov1999 $0.46
Nov1998 $0.19

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.65
Nov2017 $2.10
Nov2016 $1.40
Nov2015 $1.00
Nov2014 $0.98
Nov2013 $1.20
Nov2012 $1.49
Nov2011 $1.38
Nov2010 $1.22
Nov2009 $1.10
Nov2008 $1.24
Nov2007 $1.02
Nov2006 $0.88
Nov2005 $0.83
Nov2004 $0.62
Nov2003 $0.48
Nov2002 $0.43

Recommended Reading:

Other ModernGraham posts about the company

Adobe Systems Inc Valuation – February 2017 $ADBE
5 of the Worst Stocks to Invest In – December 2016
Adobe Systems Inc Valuation – August 2016 $ADBE
5 Speculative and Overvalued Companies to Avoid – June 2015
Adobe Systems Inc. Analysis – 2015 Update $ADBE

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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