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2021-07-26
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Adobe: A Free Cash Flow Beast, But With Squeezed Upside
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":800648196,"tweetId":"800648196","gmtCreate":1627301170815,"gmtModify":1633766384790,"author":{"id":3582948757581957,"idStr":"3582948757581957","authorId":3582948757581957,"authorIdStr":"3582948757581957","name":"GrowGrowGrow","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":3,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":18,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p>Grow Grow Grow </p></body></html>","htmlText":"<html><head></head><body><p>Grow Grow Grow </p></body></html>","text":"Grow Grow Grow","highlighted":1,"essential":1,"paper":1,"likeSize":6,"commentSize":1,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/800648196","repostId":1183141304,"repostType":4,"repost":{"id":"1183141304","kind":"news","pubTimestamp":1627300140,"share":"https://ttm.financial/m/news/1183141304?lang=&edition=full","pubTime":"2021-07-26 19:49","market":"us","language":"en","title":"Adobe: A Free Cash Flow Beast, But With Squeezed Upside","url":"https://stock-news.laohu8.com/highlight/detail?id=1183141304","media":"seekingalpha","summary":"Summary\n\nAdobe's performance since our previous article has been great, with the company delivering ","content":"<p><b>Summary</b></p>\n<ul>\n <li>Adobe's performance since our previous article has been great, with the company delivering solid top- and bottom-line results.</li>\n <li>Adobe's future growth catalysts remain robust, and the company is likely to keep growing its free cash flow.</li>\n <li>Despite its qualities and attractive prospects, the stock's valuation has expanded considerably. At its current levels, Adobe is likely overpriced, with a modest downside.</li>\n</ul>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/4d0734e83cc203d94b09a9e4daf8bdf3\" tg-width=\"1536\" tg-height=\"864\" referrerpolicy=\"no-referrer\"><span>George Khelashvili/iStock via Getty Images</span></p>\n<p>Back in September, we published anarticleon Adobe (ADBE), praising the company's qualities, sky-high margins, and attractive shareholder return prospects, which we forecasted to be in double-digits on an annualized basis. The company has continued performing greatly during this period operationally, with its most recent results highlighting the strengths of its subscription-based business model.</p>\n<p><img src=\"https://static.tigerbbs.com/8f2d64271aa724a1e5f7187bb6212e07\" tg-width=\"634\" tg-height=\"395\" width=\"100%\" height=\"auto\"></p>\n<p>Following its strong operating results, the stock has appreciated by around 30% since out our bullish recommendation, reaching new all-time highs. While we are happy for Adobe's ongoing gains, we fear that the stock may have run ahead of itself and is potentially overvalued. Let's assess.</p>\n<p><b>Latest results</b></p>\n<p>In June, Adobe reported its Q2 results, posting another quarter of excellent growth in both its top and bottom line. Revenues came in at $3.84B, representing a 22.7% Y/Y growth, fueled by an expanding global customer base which keeps exhibiting a fantastic growth momentum.</p>\n<p>Specifically, the company's \"Digital Media\" segment (which includes Adobe's flagship products such as Photoshop and After Effects offered in a SaaS model and is the largest contributor to the company's top line) saw its sales rise by 25% YoY to $2.79B. Specifically, it achieved net new annualized recurring revenue (ARR) of $518M, boosting ARR to $11.21B.</p>\n<p>Along with a robust performance in its Digital Experience and Publishing/Advertising divisions, Q2's results pushed Adobe's LTM (Last-Twelve-Month) revenues to a new all-time high of $14.39B. Impressively Adobe's LTM revenues have now hit new highs for 29 consecutive quarters.</p>\n<p><img src=\"https://static.tigerbbs.com/0302ae400307b1e412fbab21e5b17098\" tg-width=\"640\" tg-height=\"331\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\">With Adobe's global dominance in digital creation, which has allowed its SaaS model to reach a massive scale, the company enjoys gross margins of nearly 90%. As is also visible from the graph above, since the company's transition to a subscription model, its R&D, financial, and administrative expenses have been growing disproportionally to its revenues, resulting in a fantastic net income margins expansion. Net income margins currently stand at nearly 40%, which is utterly mind-boggling.</p>\n<p><b>Moving forward...</b></p>\n<p>Considering that the company is already monopolizing its industry, generating nearly $13B in annual revenues, the question of how long can its prolonged growth persist arises. The truth is, Adobe enjoys significant tailwinds, which are likely to keep resulting both in a growing subscriber base and in higher spending per subscriber in the company's extra offerings.</p>\n<p>A recent report from 360 Research Reports forecasts that the global Digital Content Creation market is anticipated to grow with a CAGR of 9.1% through 2025 to reach $16.5B. Each year it should be becoming increasingly more apparent to a brand of any size that in order to capture the most eyeballs nowadays, a successful social media marketing strategy is essential. In that regard, digital content creation is becoming more essential than ever, which should sustain a very strong momentum in Adobe signing up multi-solution partnerships with enterprise customers across the globe. Such a key customer win during the quarter was that of Nike (NKE).</p>\n<p>However, a growing digital content market is not the only catalyst for Adobe's customer growth going forward. During the quarter, for instance, the company signed NatWest Group (NWG) to help it enhance productivity through the higher use of automation and digital workflows. NatWest now processes 1.3 million electronic signature transactions annually, not only modernizing its business but also in the processsaving9 million sheets of paper, 960K gallons of water, and 336 thousand pounds of wood through choosing paperless workflows. Therefore, we believe Adobe will sustain a great momentum of growing enterprise customers ahead, which is to be powered both by companies seeking operational efficiencies and the capabilities of Adobe's solutions to help enterprises meet their ESG goals.</p>\n<p><b>Valuation, capital returns, and rating update</b></p>\n<p>As we mentioned, since our previous article and following Adobe's most recent results, shares have rallied to new all-time highs. Management's Q3 guidance pointed towards revenue growth of ~22% to $3.88B and GAAP EPS of ~$2.27, which along with the first two quarters, should lead to FY2021 EPS of $12.25. Despite the impressive results, the stock has rallied disproportionally higher, resulting in a rich valuation expansion, as visible below.</p>\n<p><img src=\"https://static.tigerbbs.com/222b8e94423aae72099044e3661177cf\" tg-width=\"640\" tg-height=\"331\" width=\"100%\" height=\"auto\"></p>\n<p>To figure out whether the stock is worth buying at 48.6X its forward net income, we are going to implement a discounted cash flow valuation method, which we believe fits the company's business model and cash flow statement composition quite nicely.</p>\n<p>We have set a declining revenue growth trajectory going forward in order to naturally account for the possibility of a slowdown. We have also set the operating margin at 39.8%, equal to its current levels (Operating Cash Flows/Revenues), despite the fact that it is likely to grow in line with the company's net income margins, as shown earlier.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/6c76731946d7467641b34324c452a02f\" tg-width=\"640\" tg-height=\"244\" width=\"100%\" height=\"auto\"><span>Source:AlphaSpreadWe have also set CAPEX as a percen</span></p>\n<p>tage of revenues at 2.80% and discounted the company's future projected cash flows by 6.29%.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/85ed7ec5cf3193fb265c217c2b2e1127\" tg-width=\"640\" tg-height=\"316\" width=\"100%\" height=\"auto\"><span>Source:AlphaSpread</span></p>\n<p>Plugging everything together and setting the terminal growth rate at 3%, the stock's intrinsic value comes out at $549.61, suggesting it is overvalued by around 12.18% from its current price levels.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/6185368d1516f501ed504c2ff35faf9c\" tg-width=\"363\" tg-height=\"460\" width=\"100%\" height=\"auto\"><span>Source:AlphaSpread</span></p>\n<p>The downside from here seems quite reasonable, as even if Adobe retains its current, strong performance in the medium term, we believe that at a nearly 5-year high forward P/E of 48.6, investors are overpaying, despite its admittedly high-quality characteristics.</p>\n<p>The high valuation multiple also affects Adobe's capital returns, which the company has a long history of delivering through stock repurchases. In fact, the company allocates the majority of its net income into buying back its own stock, as the graph illustrates.</p>\n<p><img src=\"https://static.tigerbbs.com/2e8f0828a7b8435f19f036b7273aadea\" tg-width=\"640\" tg-height=\"331\" referrerpolicy=\"no-referrer\" width=\"100%\" height=\"auto\"></p>\n<p>However, following the stock's valuation expansion, stock buybacks now have a lower effect on total returns. Assuming the stock is indeed overvalued, as we estimate, stock buybacks may even be slightly harmful from a shareholder value maximization perspective.</p>\n<p>For these reasons, we are shifting our rating in Adobe's shares from a Buy to a Hold. As much as we appreciate the company's unique qualities, including fantastic customer retention, robust growth prospects, sky-high margins, powerful moat, and strong capital returns, we view the stock as less appealing following its extended gains. That being said, we would consider Adobe a Buy again at around $550, closer to its intrinsic value as we calculated earlier.</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Adobe: A Free Cash Flow Beast, But With Squeezed Upside</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nAdobe: A Free Cash Flow Beast, But With Squeezed Upside\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-07-26 19:49 GMT+8 <a href=https://seekingalpha.com/article/4441341-adobe-free-cash-flow-beast-squeezed-upside><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nAdobe's performance since our previous article has been great, with the company delivering solid top- and bottom-line results.\nAdobe's future growth catalysts remain robust, and the company ...</p>\n\n<a href=\"https://seekingalpha.com/article/4441341-adobe-free-cash-flow-beast-squeezed-upside\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"ADBE":"Adobe"},"source_url":"https://seekingalpha.com/article/4441341-adobe-free-cash-flow-beast-squeezed-upside","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1183141304","content_text":"Summary\n\nAdobe's performance since our previous article has been great, with the company delivering solid top- and bottom-line results.\nAdobe's future growth catalysts remain robust, and the company is likely to keep growing its free cash flow.\nDespite its qualities and attractive prospects, the stock's valuation has expanded considerably. At its current levels, Adobe is likely overpriced, with a modest downside.\n\nGeorge Khelashvili/iStock via Getty Images\nBack in September, we published anarticleon Adobe (ADBE), praising the company's qualities, sky-high margins, and attractive shareholder return prospects, which we forecasted to be in double-digits on an annualized basis. The company has continued performing greatly during this period operationally, with its most recent results highlighting the strengths of its subscription-based business model.\n\nFollowing its strong operating results, the stock has appreciated by around 30% since out our bullish recommendation, reaching new all-time highs. While we are happy for Adobe's ongoing gains, we fear that the stock may have run ahead of itself and is potentially overvalued. Let's assess.\nLatest results\nIn June, Adobe reported its Q2 results, posting another quarter of excellent growth in both its top and bottom line. Revenues came in at $3.84B, representing a 22.7% Y/Y growth, fueled by an expanding global customer base which keeps exhibiting a fantastic growth momentum.\nSpecifically, the company's \"Digital Media\" segment (which includes Adobe's flagship products such as Photoshop and After Effects offered in a SaaS model and is the largest contributor to the company's top line) saw its sales rise by 25% YoY to $2.79B. Specifically, it achieved net new annualized recurring revenue (ARR) of $518M, boosting ARR to $11.21B.\nAlong with a robust performance in its Digital Experience and Publishing/Advertising divisions, Q2's results pushed Adobe's LTM (Last-Twelve-Month) revenues to a new all-time high of $14.39B. Impressively Adobe's LTM revenues have now hit new highs for 29 consecutive quarters.\nWith Adobe's global dominance in digital creation, which has allowed its SaaS model to reach a massive scale, the company enjoys gross margins of nearly 90%. As is also visible from the graph above, since the company's transition to a subscription model, its R&D, financial, and administrative expenses have been growing disproportionally to its revenues, resulting in a fantastic net income margins expansion. Net income margins currently stand at nearly 40%, which is utterly mind-boggling.\nMoving forward...\nConsidering that the company is already monopolizing its industry, generating nearly $13B in annual revenues, the question of how long can its prolonged growth persist arises. The truth is, Adobe enjoys significant tailwinds, which are likely to keep resulting both in a growing subscriber base and in higher spending per subscriber in the company's extra offerings.\nA recent report from 360 Research Reports forecasts that the global Digital Content Creation market is anticipated to grow with a CAGR of 9.1% through 2025 to reach $16.5B. Each year it should be becoming increasingly more apparent to a brand of any size that in order to capture the most eyeballs nowadays, a successful social media marketing strategy is essential. In that regard, digital content creation is becoming more essential than ever, which should sustain a very strong momentum in Adobe signing up multi-solution partnerships with enterprise customers across the globe. Such a key customer win during the quarter was that of Nike (NKE).\nHowever, a growing digital content market is not the only catalyst for Adobe's customer growth going forward. During the quarter, for instance, the company signed NatWest Group (NWG) to help it enhance productivity through the higher use of automation and digital workflows. NatWest now processes 1.3 million electronic signature transactions annually, not only modernizing its business but also in the processsaving9 million sheets of paper, 960K gallons of water, and 336 thousand pounds of wood through choosing paperless workflows. Therefore, we believe Adobe will sustain a great momentum of growing enterprise customers ahead, which is to be powered both by companies seeking operational efficiencies and the capabilities of Adobe's solutions to help enterprises meet their ESG goals.\nValuation, capital returns, and rating update\nAs we mentioned, since our previous article and following Adobe's most recent results, shares have rallied to new all-time highs. Management's Q3 guidance pointed towards revenue growth of ~22% to $3.88B and GAAP EPS of ~$2.27, which along with the first two quarters, should lead to FY2021 EPS of $12.25. Despite the impressive results, the stock has rallied disproportionally higher, resulting in a rich valuation expansion, as visible below.\n\nTo figure out whether the stock is worth buying at 48.6X its forward net income, we are going to implement a discounted cash flow valuation method, which we believe fits the company's business model and cash flow statement composition quite nicely.\nWe have set a declining revenue growth trajectory going forward in order to naturally account for the possibility of a slowdown. We have also set the operating margin at 39.8%, equal to its current levels (Operating Cash Flows/Revenues), despite the fact that it is likely to grow in line with the company's net income margins, as shown earlier.\nSource:AlphaSpreadWe have also set CAPEX as a percen\ntage of revenues at 2.80% and discounted the company's future projected cash flows by 6.29%.\nSource:AlphaSpread\nPlugging everything together and setting the terminal growth rate at 3%, the stock's intrinsic value comes out at $549.61, suggesting it is overvalued by around 12.18% from its current price levels.\nSource:AlphaSpread\nThe downside from here seems quite reasonable, as even if Adobe retains its current, strong performance in the medium term, we believe that at a nearly 5-year high forward P/E of 48.6, investors are overpaying, despite its admittedly high-quality characteristics.\nThe high valuation multiple also affects Adobe's capital returns, which the company has a long history of delivering through stock repurchases. In fact, the company allocates the majority of its net income into buying back its own stock, as the graph illustrates.\n\nHowever, following the stock's valuation expansion, stock buybacks now have a lower effect on total returns. Assuming the stock is indeed overvalued, as we estimate, stock buybacks may even be slightly harmful from a shareholder value maximization perspective.\nFor these reasons, we are shifting our rating in Adobe's shares from a Buy to a Hold. As much as we appreciate the company's unique qualities, including fantastic customer retention, robust growth prospects, sky-high margins, powerful moat, and strong capital returns, we view the stock as less appealing following its extended gains. That being said, we would consider Adobe a Buy again at around $550, closer to its intrinsic value as we calculated earlier.","news_type":1,"symbols_score_info":{"ADBE":0.9}},"isVote":1,"tweetType":1,"viewCount":365,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":12,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/800648196"}
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