Bear markets create opportunities to purchase high quality companies. Everybody knows Adobe, Inc. (ADBE), the leader in creating and sharing electronic documents, suggests Doug Gerlach, editor of Investor Advisory Service.
After peaking at almost $700 per share last December, Adobe stock has fallen almost 60%, propelled by bear market weakness for technology companies and concerns surrounding an expensive acquisition.
The flagship of its Digital Media division is Adobe Creative Cloud, a subscription service that allows customers to use creative products integrated with desktop, web, and mobile devices. The core offering of Adobe Creative Cloud is Adobe Photoshop, the world’s most advanced digital imaging and design application.
Digital Media also includes Adobe Document Cloud, a subscription service that enables complete, reliable, and automated digital document and signature workflows across desktop, mobile, web and third-party applications.
The core product offering is the ubiquitous Adobe Acrobat product that supports the PDF (Portable Document Format) file sharing standard. Adobe Document Cloud represents about one-sixth of Digital Media revenue.
Its Digital Experience division, representing 23% of fiscal 2021 revenue, focuses on providing businesses with solutions for digital marketing analytics, advertising campaign management and eCommerce customer engagement.
Historically Adobe has traded at an above-market P/E ratio, reflecting investor confidence in its competitive position and recurring revenue model from subscriptions (92% of fiscal 2021 revenue).
However, investors have reacted negatively to Adobe’s $20 billion cash-and-stock purchase of Figma, an emerging collaborative web-first application design and development platform. Given the early stage of this market we have a healthy dose of skepticism; however, Adobe management has a history of accretive acquisitions.
Analysts project Adobe can grow earnings 15% per year, but we use 12% to reflect significant amortization expense from the Figma acquisition. Five years of this growth and a capped P/E of 30 could generate a stock price as high as $536. We use a low price of $228, the average of the past five years. The upside/downside ratio is 3.7 to 1.
