After delivering an outstanding financial performance in fiscal 2022, software company Adobe Inc. (ADBE) intends to do even better in fiscal 2023, driven by the sustained demand for its offerings, unparalleled innovation, and strong talent and market position. Shares of ADBE have gained 4% over the past three months to close the last trading session at $345.84.
In this article, I have discussed several reasons why ADBE is worth owning despite its high price.
Software maker ADBE reported record revenue and operating income in fiscal 2022. The company achieved revenue of $17.61 billion, up 12% year-over-year. Digital Media segment revenue was $12.84 billion, an 11% increase year-over-year, and net new Digital Media ARR was $1.91 billion during the quarter.
ADBE’s Creative revenue grew 10% year-over-year to $10.46 billion, while Digital Experience segment revenue came in at $4.42, up 14% year-over-year. Also, its non-GAAP operating income and net income were $7.95 billion and $6.46 billion, up 9.5% and 7.6% year-over-year, respectively. The company’s solid financial performance drove record operating cash flows of $7.84 billion for the year.
Dan Durn, ADBE’s executive vice president and CFO, said, “Strong demand for our offerings, industry-leading innovation and track record of top-and bottom-line growth set us up to capture the massive opportunities in 2023 and beyond.” For the full-year 2023, the company expects total revenue of $19.10 billion to $19.30 billion and non-GAAP earnings per share of $15.15-$15.45.
However, ADBE is quite expensive at the current price level. In terms of forward non-GAAP P/E, ADBE is trading at 22.63x, 14.31% higher than the industry average of 19.80x. The stock’s forward EV/EBITDA multiple of 16.66 is 28.1% higher than the industry average of 13.01. Also, its forward Price/Sales of 8.23x is 202.8% higher than the industry average of 2.72x.
Here is what could influence ADBE’s performance in the upcoming months:
Positive Latest Developments
On February 8, 2023, ADBE and Microsoft Corp. (MSFT) partnered to transform the future of digital work and life by bringing industry-leading Acrobat PDF experience to more than 1.4 billion Microsoft Windows users in Microsoft Edge. ADBE’s Acrobat PDF technology in Microsoft Edge will be available to all Windows 10 and 11 users beginning in March 2023, with an opt-in option for organizations with managed devices.
This collaboration between the two industry giants should expand their market reach and boost profitability.
On October 18, 2022, ADBE shared the latest innovations for Adobe Express, the template-based web and mobile tool that lets anyone create, edit, customize, schedule, and share standout content. Moreover, workflows across Adobe Express and Creative Cloud apps deliver professional-looking content. Adobe Express reaches nearly 43 million K-12 teachers and students globally.
Also, in the same month, ADBE announced the expansion of collaboration tools with Adobe Creative Cloud and Document Cloud, allowing new workflows that empower creators to meet growing content demand across various platforms. Photoshop and illustrator introduced new share-for-review collaboration capabilities.
In the fiscal fourth quarter that ended December 2, 2022, ADBE’s total revenue increased 10.1% year-over-year to $4.53 billion. Its net new Digital Media Annualized Recurring Revenue (ARR) came in at $576 million. The company exited the quarter with a Digital Media ARR of $13.97 billion. The company’s record fourth-quarter Digital Media net new ARR and strong Adobe Experience Platform bookings drove its business momentum.
Furthermore, ADBE’s gross profit grew 9.8% year-over-year to $3.96 billion. The company reported a non-GAAP operating income of $2.02 billion, up 8.9% year-over-year. Its non-GAAP net income increased 9.1% year-over-year to $1.68 billion. In addition, the company’s cash inflows from operating activities came in at $2.33 billion, a 13.5% increase year-over-year.
Favorable Analyst Estimates
Analysts expect ADBE’s revenue for the fiscal 2023 first quarter (ended February 2023) to come in at $4.62 billion, representing an increase of 8.5% year-over-year. The consensus EPS estimate of $3.68 for the ongoing quarter indicates a 9.1% year-over-year increase. It’s no surprise that the company has surpassed the consensus EPS estimates in each of the trailing four quarters.
In addition, ADBE’s revenue and EPS for the fiscal year (ending November 2023) are expected to rise 9.4% and 11.5% year-over-year to $19.26 billion and $15.28, respectively. Also, analysts expect the company’s revenue and EPS for fiscal 2024 to grow 12% and 14.3% year-over-year to $21.57 billion and $17.46, respectively.
In terms of the trailing-12-month gross profit margin, ADBE’s 87.70% is 79.2% higher than the 48.94% industry average. And its 34.64% trailing-12-month EBIT margin is 489% higher than the industry average of 5.88%. Likewise, the stock’s 27.01% trailing-12-month net income margin is 826% higher than the industry average of 2.92%.
Furthermore, ADBE’s trailing-12-month ROCE, ROTC, and ROTA of 32.97%, 19.98%, and 17.51% compare to the industry averages of 4.75%, 3.21%, and 1.54%, respectively.
POWR Ratings Show Promise
ADBE’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has a grade of A for Quality, in sync with its higher-than-industry profitability. In addition, it has a B grade for Sentiment, consistent with analysts’ upbeat estimates.
ADBE is ranked #22 out of 136 stocks in the Software-Application industry.
Beyond what I have stated above, we have also given ADBE grades for Growth, Value, Stability, and Momentum. Get access to all ADBE ratings here.
Software giant ADBE’s revenue has grown at a 16.4% CAGR over the past three years, while its net income and EPS have increased at CAGRs of 17.2% and 19%, respectively. Furthermore, continued innovation positions the company well to capture numerous opportunities in 2023 and beyond.
Given ADBE’s solid financials, high profitability, and promising growth prospects, we think investing in this software stock could be wise now.
How Does Adobe Inc. (ADBE) Stack up Against Its Peers?
ADBE has an overall POWR Rating of B. One could also check out these other stocks within the Software-Application industry with an A (Strong Buy) rating: Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and Xperi Inc. (XPER).
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ADBE shares rose $2.91 (+0.84%) in premarket trading Thursday. Year-to-date, ADBE has gained 3.11%, versus a 4.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...
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