Software Stocks

Adobe Inc Valuation – February 2019 $ADBE

Company Profile (excerpt from Reuters): Adobe Inc., formerly 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 Experience 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.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of ADBE – February 2019

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 $122,633,826,630 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.13 Fail
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 241.00% Pass
6. Moderate PEmg Ratio PEmg < 20 49.88 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 13.28 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 1.13 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 7.42 Fail
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 $5.03
MG Growth Estimate 15.00%
MG Value $193.58
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $72.91
MG Value based on 0% Growth $42.74
Market Implied Growth Rate 20.69%
Current Price $250.82
% of Intrinsic Value 129.57%

Adobe Inc does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $1 in 2015 to an estimated $5.03 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 20.69% 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 Inc revealed the company was trading above its Graham Number of $57.72. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 49.88, which was below the industry average of 56.55, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-9.18.

Adobe Inc scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$9.18
Graham Number $57.72
PEmg 49.88
Current Ratio 1.13
PB Ratio 13.28
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2018
Total Current Assets $4,857,039,000
Total Current Liabilities $4,301,126,000
Long-Term Debt $4,124,800,000
Total Assets $18,768,682,000
Intangible Assets $12,650,049,000
Total Liabilities $9,406,568,000
Shares Outstanding (Diluted Average) 495,611,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.72
Nov2018 $5.20
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.03
Nov2018 $3.30
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

Recommended Reading:

Other ModernGraham posts about the company

Adobe Systems Inc Valuation – April 2018 $ADBE
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

Other ModernGraham posts about related companies

Autodesk Inc Valuation – February 2019 $ADSK
F5 Networks Inc Valuation – February 2019 $FFIV
Cadence Design Systems Inc Valuation – January 2019 $CDNS
Oracle Corporation Valuation – January 2019 $ORCL
Red Hat Inc Valuation – January 2019 $RHT
Alphabet Inc Valuation – January 2019 $GOOG $GOOGL
Ansys Inc Valuation – January 2019 $ANSS
Citrix Systems Inc Valuation – January 2019 $CTXS
Microsoft Corporation Valuation – November 2018 $MSFT
Cisco Systems Inc Valuation – November 2018 $CSCO

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top