Is now a Good time to Buy Adobe?

Adobe is announcing its company earnings this week. As of today, Adobe share price is $465.43, is down 21.99% in 2024, one of the poor-performance software companies. The questions remain in the Investor's mind: Is Adobe a good buy before earning?

Let us take a look at Adobe Business Model

Adobe’s Business Model:

Adobe Inc. is a software company that offers products and services used by professionals, marketers, knowledge workers, application developers, enterprises, and consumers.

Their Creative Cloud addresses the needs of creative professionals, providing tools for creating, managing, delivering, measuring, optimizing, and engaging with compelling content and experiences across various platforms and devices.

Adobe’s business model primarily revolves around a subscription-based model. Customers pay annual or monthly fees to access Adobe’s services, which has been highly successful for the company1.

The company has three main segments:

• Digital Media: Includes products like Photoshop, Illustrator, and Acrobat.

• Digital Experience: Focuses on marketing and analytics solutions.

• Publishing and Advertising: Involves products related to publishing and advertising content.

Adobe generates revenue from:

• Subscription Fees: Users pay for Creative Cloud subscriptions.

• Enterprise Solutions: Large organizations use Adobe’s marketing and analytics tools.

• Licensing and Services: Licensing fees for specific products and professional services.

• Advertising and Publishing: Revenue from advertising-related products and services.

In summary, Adobe’s success lies in its subscription-based model, diverse product offerings, and dominance in the software market.

Revenue of Adobe

Cash flow of Adobe

Let’s Analyze Adobe in the following steps

Step #1 Economic Moat

Let’s see if Adobe retains its economic moat and competitive advantages.

1. Economic Moat

a) Strong Branding Effect

Rating: 10 Adobe has a strong brand presence, particularly with flagship products like Photoshop, Illustrator, and Acrobat. Their brand is synonymous with high-quality creative software, which provides them with a significant advantage.

b) Being Monopoly in the Market (Market Leadership)

Rating: 9 While not a monopoly, Adobe is a clear leader in the creative software market. Its dominance in areas like photo editing, graphic design, and PDF management is unparalleled, giving it significant market power.

c) Network Effect

Rating: 8 Adobe benefits from a network effect where the value of its software increases as more people use it. For example, designers and clients often use Adobe software to ensure compatibility and consistency in creative work.

d) High Switching Cost

Rating: 9 Switching costs are high for Adobe’s customers due to the time and effort required to learn new software, as well as the potential loss of compatibility with existing Adobe files and workflows.

e) Patents and Trade Secrets

Rating: 7 Adobe holds numerous patents and trade secrets, particularly in areas like digital imaging and document management. However, this is not the sole reason for their moat, as software patents can be more easily worked around than those in other industries.

f) Economies of Scale

Rating: 8 Adobe benefits from economies of scale, particularly in R&D and marketing. As a large company, it can spread these costs over a vast number of products and services, reducing per-unit costs and enhancing profitability.

Adobe had a wide economic moat with durable competitive advantages so far.

Step #2 Financial Health of Adobe

Let us use Gurufocus to check the final health of Adobe.

Consistent growth in Revenue and Net Income in the past 10 years

Consistent growth in Net operating cash flow and Free cash flow in the past 10 years

Cash / Debt ratio seems healthy

ROE of Adobe is 31.1% which meet my criteria (>15%).

Looking at Adobe past financial data, and it seems to be financially healthy.

Step #3: Analyse Risk

a) Business Risk

• Competition: Adobe faces competition from other software providers like Corel, Affinity, and even free open-source alternatives like GIMP and Inkscape.

• Market Saturation: The creative software market is mature, and growth in new users might slow down.

b) Technology & Disruptive Risk

• Technological Advancements: Rapid technological changes can disrupt Adobe’s business model. For example, advancements in AI and machine learning could lead to new competitors or make existing tools obsolete.

• Cloud Dependence: As Adobe has shifted to a subscription-based model with Creative Cloud, any significant issues with cloud services (e.g., outages, security breaches) could impact customer satisfaction and retention.

c) Key Person Risk

• Leadership Changes: Adobe's success is partly attributed to its strong leadership. Changes in key management positions, especially if not well-handled, could pose risks.

• Talent Retention: Retaining top talent is crucial for continuous innovation. High turnover rates in key departments could affect Adobe's product development and competitive edge.

Adobe needs to lead the AI technology to maintain its economic moat.

Step #4 Valuation of Adobe - Is the current price considered cheap to entry?

Now, let us use several tools to find out the fair value of what Adobe worth.

Tool #1 Gurufocus

The fair value from Gurufocus is $586, share price $465.43, suggesting Adobe is modestly under value, by 25%.

Tool #2 Simplywall.st

Simplywall.st fair value is $573.20, 18.8% undervalue.

Tool #3 Jitta.com

Interestingly, Jitta values Adobe only at $368.52, 79% over Jitta (valuation) line.

It seems Jitta is far away and consider as Outlier, we shall take the average fair value from Gurufocus and Simplywall.st, which is $579.83, which is 20% under-value.

PE Ratio of Adobe is near its average PE historical data.

Adobe vs Competitor - Share price comparison

Adobe and Workday had been fall the most this year.

Adobe vs Competitor in term of PE Ratio

Adobe shows a good PE Ratio compare to its peers.

Step #5 Is now a good time to entry?

Let us take a look at the Technical chart of Adobe

Currently All the Moving average (short, middle, long term) are pointing downward, showing that Adobe is in the clear down-trend. The near support level is $424. After touching the recent low of $435, the stocks started to go up last week, before the earnings announcement, with several overhead resistance.

Conclusion

Adobe is a great company, with wide economic moat, good financial strength. Based on the average valuation from Gurufocus and Simplywall.st, suggest the current share price is approximate 20% under its fair value. The current PE ratio is near its historical PE ratio suggest the current price is reasonably level.

As of now, Adobe is in the down-trend where all short/middle/long term moving average are pointing downward. If you are trader who trade based on technical chart, it might not be the right timing.

If you are value investor who believe to invest in the long term, it might be a good time for you to accumulate some stocks, as it is 20% under-value.

This article is for sharing of information, and not a buy/sell recommendation. Pls do your own due diligent before taking any position, as you are responsible for your own investment.