Adobe Inc

Adobe Inc. (NASDAQ: ADBE), formerly Adobe Systems Incorporated, is a software company. Professionals, marketers, knowledge workers, application developers, organizations, and consumers use the company's technologies and services to create, manage, measure, optimize, and engage with compelling content and experiences. Digital Media, Digital Experience, and Publishing are its three segments.

Recent Developments

• Adobe April’s digital price Index: Adobe released the latest online inflation statistics from the Adobe Digital Price Index (DPI), powered by Adobe Analytics, on May 11, 2022.
• Online pricing grew 2.9 percent year over year (YoY) in April 2022, down from a record 3.6 percent YoY growth in March — a 0.5 percent month-on-month decline (MoM).
• While this is the 23rd straight month of online pricing rises year over year, April shows early indications of the trend slowing.
• In April, prices fell in moreover half of the DPI's tracked categories (10 out of 18). In April, USD 77.8 billion was spent online, down USD 5.28 billion from the previous month.
• Russia-Ukraine war affects: Adobe put a suspension to all new sales of Adobe goods and services in Russia and Belarus on March 4, 2022. Adobe also lowered its Digital Media ARR balance by USD 75 million on March 23, 2022, which reflected all ARR for current business in Russia and Belarus. While Adobe will continue to supply Digital Media services in Ukraine, it has cut ARR by USD 12 million, which represents the entirety of its Digital Media business in the country. For the fiscal year 2022, this resulted in a total ARR decrease of USD 87 million and a revenue impact of USD 75 million.
• Shares repurchase program: The company repurchased 3.8 million shares in Q1 FY22 at a cost of USD 2.1 billion. This repurchase was a part of the previously announced program to buy back USD 15 billion worth of shares till 2024, out of which USD 10.7 billion is remaining.

Key Takeaways from first quarter FY22 financial results

• In the first quarter of the fiscal year 2022, Adobe generated record revenue of USD 4.26 billion, representing a 9% year-over-year increase or 17% adjusted year-over-year growth. On a GAAP basis, diluted profits per share were USD 2.66, while on a non-GAAP basis, they were USD 3.37.
• Segment based revenue generation:
• The Digital Media sector generated USD 2.55 billion in creative revenue, up 7% year over year and 16% adjusted. Strong creative engagement and retention across individual and SMB segments; new customer demand across large organizations; and sustained growth of subscription licensing for individual flagship applications such as Photoshop, Illustrator, and Premiere, as well as strength in the company's Adobe Stock business were among the company's creative growth drivers.
• In terms of Adobe's Digital Experience segment, the company generated revenue of USD 1.06 billion in Q1, up 13% year over year and 20% adjusted. Digital Experience subscription sales were USD 932 million, up 15% year over year and 22% adjusted. New logo acquisition across the company's solutions; strong customer retention because of investments in product innovation, greater value realization, and customer experience; larger deal sizes in the Workfront business; traction upselling customers to new cloud-native solutions; and momentum with Content & Commerce were among the first quarter Digital Experience growth drivers.
• Adobe's effective tax rate was 18 percent GAAP and 18.5 percent non-GAAP in the first quarter. The tax rate was greater than planned, owing to lower-than-anticipated tax advantages from stock-based compensation.
• In the first quarter, GAAP operating income was USD 1.58 billion, while non-GAAP operating income was USD 1.99 billion. GAAP net income was USD 1.27 billion, and non-GAAP net income was USD 1.60 billion, with Remaining Performance Obligations ("RPO") at USD 13.83 billion at the end of the quarter, up 19% year over year.

Balance Sheet & Liquidity Position

• Cash and Cash equivalents reduced from USD 3.84 billion at the end of the quarter to USD 2.74 billion as of 31^st December 2021, while cash flows from operations were USD 1.77 billion for the quarter almost the same as USD 1.77 billion for the same period last year.
• Long term Debt for the company decreased from USD 4.12 billion as of 31^st December 2021 to levels of USD 3.63 billion at the Q1 FY22 end, bettering the leverage for the company.

Key Risks

• Technology and Innovation: Information security events, cyberattacks, password theft, service disruptions, and other technological hazards threaten Adobe. As a result, technological risk poses a threat to Adobe's operations. Furthermore, as technology and innovation evolve, Adobe must adapt to preserve its current competitive edge.
• Regulatory and legal risk: Adobe's use of artificial intelligence technology in its products may raise social and ethical issues that could harm its business. Adobe's AI-powered products draw controversy because of their impact on society, the company may experience reputational damage and legal liability.

Outlook

The following are Adobe's second-quarter fiscal year 2022 objectives, which consider current macroeconomic and geopolitical conditions:

• Total revenue is estimated to be about USD 4.34 billion for the quarter.
• Annualized recurring revenue from digital media is estimated to be roughly USD 440 million in net new ARR.
• Revenue growth in the Digital Media category is forecast to be between 13 and 14 percent year over year, while revenue in the Digital Experience segment is expected to be between 15 and 16 percent.
• The GAAP tax rate is estimated to be approximately 20%, with GAAP EPS around USD 2.44.

Valuation Methodology: EV/Sales Multiple - Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, ADBE's share price has corrected by 41.22%. The stock is currently leaning towards the lower end of its 52-week range of USD 370.27 to USD 699.54. We have valued the stock using the EV/Sales multiple-based relative valuation method and arrived at a target price of USD 480.90. We believe that the company will continue to trade at a premium from its peer's average considering strong fundamentals, competitive advantages in profitability margins, and a good outlook that gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, robust top-line results, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 394.38, as of May 19, 2022.

One Year Technical Chart, as of May 19, 2022. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Closing Price as of May 19, 2022.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors' appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.

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