Adobe Deep Dive - Is the Creative SaaS Giant finally a Buy?
Today, we will discuss the Creative Giant Adobe. has it become a buying opportunity after the recent AI innovations or is it in danger to get replaced.
Executive Summary:
Great Business with a leading position in the Creative SaaS Sector
Healthy Balance Sheet, Strong Financials, and Declining Sharecount
30% Down from All-Time-Highs and 24% Down from 2023 Highs
30% Margins and steadily growing Return Ratios across the board
Uncertainty about the future of the Creative Industry caused stock drawdown
If you’re unaware of my Deep Dives, here’s a short explanation of what to expect today. Deep Dives mostly feature large and complex companies. Small and micro-cap investment pitches are shorter since they have less complex company structures and often fewer macro impacts.
My deep dives are meant to give a comprehensive picture of the entire company. That includes the business model, products, macro factors, and, of course, everything financially related to the company.
If you’re already aware of the company's work and only want to see the financial and valuation parts, feel free to skip the rest. If you don’t know the company well and are interested in the entire picture, I think you’ll find a lot here.
Structure:
Business and Products
Digital Media
Digital Experience
Publishing and Advertising
Financials
Overview
Valuation and Ratios
Recent Quarter
Long-Term Financials and Outlook
Macro Picture
AI - Threat or Chance
Competition
Competitive Advantages
Competitors and Mergers
Risks
Conclusion and Valuation
Business and Products
Adobe's business model is built around providing subscription-based access to its comprehensive ecosystem of software tools and services, which focuses on creative work like photography and video editing. By adopting a platform approach and emphasizing continuous innovation, Adobe has solidified its position as a trusted partner for individuals, enterprises, and organizations. Just like Google became a synonym for looking something up on the internet, Photoshop became a synonym for editing pictures.
But Adobe has a lot more products than Photoshop. The business is organized into three main segments:
Digital Media
Digital Experience
Publishing and Advertising
Let's briefly explore each of Adobe's key products and services within the segments:
1. Digital Media:
Digital Media is the core of Adobe’s business and what it is most known for. The customers are creative professionals such as photographers, video editors, and content creators. A lot of them work for big tech companies.
Creative Cloud
Adobe Photoshop: Photoshop is the industry-standard software for image editing and graphic design. It offers a wide range of tools and features for retouching photos, creating digital artwork, and designing graphics for web, print, and multimedia projects.
Adobe Illustrator: Illustrator is a vector graphics editor used for creating scalable illustrations, logos, icons, typography, and other artwork. It provides drawing tools, precision controls, and integration with other Adobe Creative Cloud apps.
Adobe Premiere Pro: Premiere Pro is a professional video editing software used for editing, organizing, and exporting video content. It offers advanced editing tools, timeline-based editing, support for various video formats, and integration with other Adobe apps like After Effects and Audition.
Adobe After Effects: After Effects is a motion graphics and visual effects software used for creating cinematic visual effects, animations, titles, and compositing video footage. It features tools for animation, motion tracking, keying, and 3D rendering.
Adobe Lightroom: Lightroom is a photo editing and organization software tailored for photographers. It provides tools for editing photos, organizing them into collections, and applying presets and filters.
Document Cloud
Adobe Acrobat DC: Acrobat DC is a comprehensive PDF editor and converter that allows users to create, edit, annotate, and digitally sign PDF documents. It offers features for combining multiple files into a single PDF, converting PDFs to other formats, and protecting PDFs with passwords and permissions. A new feature currently developed by Adobe is an AI assistant that can summarize PDFs and answer questions regarding them.
Adobe Sign: Adobe Sign is an electronic signature solution that enables users to electronically sign and send documents for signature. It streamlines document workflows, reduces the need for paper-based processes, and ensures the legality and security of electronic signatures.
2. Digital Experience
The main product of the Digital Experience segment is the Adobe Experience Cloud, which features a set of products and services to optimize customer experiences, marketing and commerce analytics. The main customers are large corporate clients, including marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, and data scientists.
The main offerings in the Experience Cloud network are:
Adobe Analytics: Analytics is a data analytics and reporting platform that helps businesses measure, analyze, and optimize their digital marketing performance. It provides insights into website traffic, user engagement, conversion rates, and other key metrics to inform data-driven marketing strategies.
Adobe Marketing Cloud: Marketing Cloud is an integrated marketing platform that enables businesses to manage and optimize their digital marketing campaigns across multiple channels. It offers tools for campaign management, audience segmentation, personalization, and marketing automation.
Adobe Advertising Cloud: Advertising Cloud is a programmatic advertising platform that allows businesses to plan, buy, and optimize digital ad campaigns across various channels and devices. It offers features for audience targeting, media buying, ad creative management, and performance measurement.
3. Publishing and Advertising
The Publishing and Advertising segment includes eLearning solutions, technical document publishing, web conferencing, document and forms platforms, web app development, high-end printing, and Adobe Advertising offerings.
The customers are graphic professionals and publishers. Revenue from the legacy Publishing products comes from licensing technology to OEMs manufacturing workflow software, printers, and output devices. Revenue in Advertising is typically generated through usage-based offerings. This segment is by far the smallest and not an important part of Adobe’s business going forward.
Financials
Let’s start with a quick overview before we discuss the most recent quarter and dive deeper into the drivers of Adobe’s financials.
This chart gives a great and quick overview of Adobe’s business. I won't go into any details here, as that will follow in the next part. But I think having an overview like this can help with the broader understanding. Unsurprisingly, the bulk of Adobe’s revenues come from its Digital Media business (73%), followed by Digital Experience (25%) and the Publishing and Advertising business (2%), which does not play a significant role in Adobe’s financials.
Operational Performance, Valuation and Ratios
Adobe's market cap is $220 billion, which gives it a 27x Forward P/E and an NTM Market Cap / Free Cash Flow of 24x, resulting in a Free Cash Flow yield of 4.1%. In the historical context, this makes it cheaper than the average over the last five years and pretty much all other times of Adobe’s existence. Apart from the All-time-low in late 2022.