Adobe (ADBE) is the world's largest developer of software for creating various media content, including documents, video files, web page layout, graphics for video games, movies, clips, etc. The most popular products of the company are Photoshop, Illustrator, InDesign, After Effects. The issuer's key operating segments are digital multimedia solutions (73% of revenue), as well as products for online marketing and digital commerce (27% of revenue). From a geographical point of view, the company's sales are distributed as follows: North and South America account for 58.2%, Europe and the Middle East 26.6%, Asia 15.1%.
Key investment theses:
- Among the medium-term investment advantages of the issuer, we highlight Adobe's strong position in the industry. Thus, in the segment of solutions for processing photo and video files, according to open sources, the company's solutions account for 55-70% of the market, and in a number of product niches Adobe software has no quality analogues. A very high value proposition allows you to maintain the price strength of the company, which translates into a high marginality of operations. The growth of business digitalization, the expansion of functionality, the development of the AI segment, as well as the spread of 5G networks will stimulate increased demand for content creation solutions. Thus, Deutsche Bank Securities estimates the CAGR of the creative segment at 15% in the future until 2025. The total volume of the target market for content creation software will expand, according to Adobe forecasts, to $63 billion by 2024, with an increase of a solid 54% compared to 2023. Separately, we note the Creative Cloud segment: according to the forecast of the issuer's management, in 2022 the volume of the target market in this direction will be about $31 billion.
- In the segment of cloud documents and digital signatures (about 30% of the market), the company also demonstrates strong demand dynamics against the background of the development of mobile and web versions of products. According to the findings of Bloomberg Intelligence, the company's target market will grow by 2023 almost four times compared to 2020. According to the latest quarterly report, the number of Acrobat Web users increased by 100% YoY, the number of signatures using Adobe Sign increased by 87% YoY.
- According to data from open sources, the combined share of Adobe Marketing and Marketo products allows the issuer to maintain leading positions in the segment. Although Magento (an e-commerce platform acquired by Adobe in 2018) is inferior in market share to comparable organizations (Shopify, WooCommerce), in a recent Gartner report Adobe was named one of the leaders in the segment of e-commerce solutions, due to the broad analytical functionality, depth of solutions and integration capabilities of the company's products. In the future, until 2025, according to IDC estimates, this area of Adobe's business can expand by 20%.
- The developer maintains a strong growth momentum in the relatively new market segment of 3D solutions with the Adobe Substance 3D Collection product line. We believe that the development of the direction will contribute to the improvement of the company's position both in the gaming and professional solutions sector. The development of VR&AR contributes to the growth of the direction: according to a study by The Business Research Company, the CAGR of the market for VR& AR solutions in the future until 2025 will be 45%, the volume of the target market will reach $ 13.1 billion.
- In our opinion, the negative reaction of investors to the company's latest quarterly report was excessive. Adobe's revenue growth rates for October-December 2021 amounted to 20%, exceeding the consensus and the initial forecast of management by 0.5% and 1%, respectively. Non-GAAP diluted EPS increased by 13.9% to $3.2, coinciding with market estimates and exceeding management expectations by 0.5%. We believe that the normalization of growth rates was expected against the background of a high base in 2021. Management announced an increase in R&D expenses last quarter, so we believe that investors accustomed to strong results from Adobe simply expected more from the company. At the same time, the demand for the issuer's products remains strong, and the amount of obligations to be fulfilled (RPO) increased by 23% (+1 percentage point QoQ). Taking into account the correction of ADBE quotes to the levels of five-year average multipliers for P/E, we believe that good conditions have now been created for entering a long position.
- From the point of view of technical analysis, the situation is also in favor of the bulls: the RSI oscillator is currently in the oversold zone (at the level of 27.07), which indicates a likely rebound in quotes.
The target price for ADBE paper is $618.5 per share. The recommendation is "buy".