ADBE Stock: Is Adobe a Buy in Q4 of 2022?
The equity market sell-off has
been brutal for investors in the first nine months of 2022. In
fact, the tech-heavy Nasdaq Composite index is down 32% from
all-time highs, wiping off massive investor wealth in the
But a bear market offers
investors an opportunity to build generational wealth and derive
exponential gains over time. You need to identify companies that
have strong balance sheets and are gaining market share in the
verticals where they operate.
So, let’s see if
Adobe (NASDAQ: ADBE) is a stock that should be part of your equity
portfolio in Q4 of 2022.
Adobe falls post Figma acquisition
Adobe is a
digital media software
company that offers
services to its suite of enterprise and individual customers. In
its recent quarter, Adobe increased sales by 13% year over year to
$4.43 billion, which was just below Wall Street estimates.
Comparatively, net income rose 7% to $1.6 billion or $3.4 per
share, compared to forecasts of $3.34 per share.
However, its lower-than-expected
guidance and an acquisition announcement derailed Adobe shares in
Adobe stock lost significant
momentum in September after the company disclosed its intention to
acquire Figma for a whopping $20 billion.
Founded in 2012, Figma offers
design teams a platform to build together by consolidation tools
and simplifying workflows.
Adobe claims Figma’s total
addressable market is around $16.5 billion, providing the company
with the opportunity to increase sales at an accelerated pace,
given it is forecast to report annual recurring revenue of $400
million by the end of 2022.
But it also indicates that Adobe
has paid 50x forward sales for the acquisition, which is quite
steep, as multiples have been slashed this year due to a
The acquisition will be funded by
cash and stock (50% each). So, Adobe will have to pay Figma $10
billion in cash, spending the free cash flow it generated in the
last two years on this deal.
Figma’s revenue in 2022 accounts
for just 1.2% of its TAM.
What next for ADBE stock and investors?
In fiscal Q2 of 2022 (ended in
August), Adobe’s Digital Media segment accounted for 73% of total
revenue. This business includes verticals such as Creative and
Document Clouds. The rest was generated from the Digital Experience
business, which includes enterprise-oriented marketing, digital
workflow services, and analytics.
The two segments experienced
revenue growth of more than 20% in 2021. However, in the last three
quarters top-line growth has decelerated significantly as Adobe is
now forecast to end fiscal 2022 with sales of $17.6 billion, an
increase of 11.6% year-over-year.
Adobe’s profit margins are also
trending lower in fiscal 2022, and its gross margins fell by 60
basis points in the last three quarters to 87.8%. Comparatively,
the operating margin fell by 170 basis points to 35.1%.
Given Figma is unprofitable, the
acquisition could compress Adobe’s operating margins further in the
The final verdict
Adobe stock is valued at 21x
forward earnings and 7x forward sales, which might be quite
expensive for the value investor. But ADBE is a growth stock and is
part of an expanding addressable market. So, you should expect the
company to trade at a premium.
Yes, AdobeU+02019s stock price is
likely to move lower, especially if market sentiment remains
bearish. But analysts remain bullish and expect ADBE stock to surge
by more than 30% in the next 12 months.
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