📈 Adobe
Investment case Adobe
Hi Partner 👋
I’m Pieter and welcome to a 🔒 subscriber-only edition 🔒 of Compounding Quality.
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Adobe is one of the best-performing companies in the world.
An investment of $10,000 turned into $4.2 million (!) since 1994.
Let’s teach you everything you need to know about this beautiful compounder.
Adobe - General Information
👔 Company name: Adobe
✍️ ISIN: US00724F1012
🔎 Ticker: ADBE
📚 Type: Oligopoly
📈 Stock Price: $473
💵 Market cap: $212 billion
📊 Average daily volume: $1.6 billion
Please note that we also have investment cases of S&P Global, LVMH, Copart, Mastercard, Fortinet, and Lululemon Athletica available on the website.
Onepager
Here’s a onepager with the essentials of Adobe:
(Click on the picture to expand)
15-Step Approach
Now let’s use our 15-step approach to analyze the company.
At the end of this article, we’ll give Adobe a score on each of these 15 metrics. This results in a Total Quality Score.
1. Do I understand the business model?
Adobe was founded in 1982 based on the simple idea of creating innovative products that change the world. The American company offers technologies that help to bring any digital experience to life.
In total, 94% (!) of Adobe’s revenues are generated via subscriptions. This provides them with predictable cash flows.
Adobe is active in 3 segments:
Creative Cloud (73.2% of sales)
Creative Cloud is a collection of over 20 desktop and mobile apps and services for photography, design, video, web, UX, and more, enabling creative professionals and hobbyists to create, collaborate, and bring their ideas to life.
Products: Adobe Photoshop, Adobe Illustrator, Adobe InDesign, …
Document Cloud (25.2% of sales)
Document Cloud is a suite of cloud-based software applications that provides tools for document creation, sharing, signing, and management, facilitating seamless digital document workflows for individuals and businesses.
Products: Adobe Acrobat, Adobe Esign, and Adobe Scan
Experience Cloud (1.6% of sales)
Experience Cloud is a comprehensive set of cloud-based solutions for marketing, analytics, advertising, and commerce, designed to help businesses deliver personalized customer experiences across all digital touchpoints.
Products: Adobe Analytics, Adobe Audience Manager, …
2. Is management capable?
Adobe was founded in 1982 by Charles Geschke and John Warnock. Both gentlemen unfortunately passed away in 2021 and 2023 respectively.
Shantanu Narayen is the current CEO of Adobe. Narayen has been working for Adobe since 1998. He joined as a senior vice president of worldwide product development and gradually worked his way up until he became the CEO of Adobe in 2007. His equity stake in Adobe is worth 7.1x his annual salary.
Dan Durn has been the CFO of Adobe since 2021. Before joining Adobe in 2021, he was the CFO of Applied Materials.
In total, all directors and executive officers own 1.1 million shares of Adobe (value: $541 million). Total insider ownership at Adobe is less than 1%.
3. Does the company have a sustainable competitive advantage?
Adobe has a competitive advantage for sure.
Adobe’s products like Photoshop and Adobe Acrobat have become the industry standard and many creative professionals rely on their tools.
Furthermore, Adobe also benefits from a strong brand name and the high loyalty of its clients. This makes it very difficult for newcomers to gain market share.
The company also enjoys network effects (our most preferred moat source). The company has an extensive ecosystem of products and services that become more valuable as more people use them.
Companies with a sustainable competitive advantage are often characterized by the following:
Gross Margin: 88.1% (Gross Margin > 40%? ✅)
ROIC: 21.5% (ROIC > 15%? ✅)
4. Is the company active in an attractive end market?
Adobe is active in an attractive end market.
They should be able to benefit from Artificial Intelligence as Adobe uses AI to drive future growth.
Here are a few examples:
Adobe Sensei: helps to automate time-consuming tasks and enables users to focus on the creative aspects of their work
Sensei can automatically label and categorize images within Lightroom as well as propose enhancements to enhance the quality of a photograph in Photoshop.
Content-Aware Fill: A feature in Photoshop employs AI to automatically fill in regions of an image where objects or people have been erased.
Adobe XD: A design tool tailored for crafting user interfaces and experiences leverages AI to recommend design components and layouts.
…
The company holds a dominant position in several markets that should be able to grow at attractive rates:
As you know by now, Adobe is active in 3 main segments. Here’s what their main rivals look like in different segments:
Creative Cloud: No real competitor with the same scale and product diversification
Document Cloud: DocuSign
Experience Cloud: Salesforce, Google Analytics, Mailchimp (Intuit), HubSpot, …
5. What are the main risks for the company?
Some of the main risks for Adobe:
The market is competitive (especially in Experience Cloud)
Competitors like Microsoft and Salesforce
Shantanu Narayen (Adobe’s CEO) is responsible for a huge part of Adobe’s success. He successfully transformed Adobe into a SaaS business
Technological disruption
Regulatory risks
Dependence on global economic conditions
Rich valuation level (see later)
6. Does the company have a healthy balance sheet?
We look at 3 ratios to determine the healthiness of Adobe’s balance sheet:
Interest Coverage: 64.5x (Interest Coverage > 15x? ✅)
Net Debt/FCF: Net cash position (Net Debt/FCF < 4x? ✅)
Goodwill/Assets: 44.5% (Goodwill/assets not too large? < 20% ❌)
Adobe’s balance sheet looks very healthy.
However, they have quite some goodwill on their balance sheet.
7. Does the company need a lot of capital to operate?
We prefer to invest in companies with a CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.
Adobe:
CAPEX/Sales: 2.5% (CAPEX/Sales < 5%? ✅)
CAPEX/Operating Cash Flow: 5.6% (CAPEX/Operating CF? < 25% ✅)
The capital intensity of Adobe is low. This is something we love to see.
Now let’s dive into the most important Fundamentals of Adobe.
We will give Adobe a Total Quality Score based on all 15 metrics. And determine whether Adobe might be an interesting buy.