Adobe Inc (ADBE, Financial) recently experienced a daily gain of 1.83% and a 3-month gain of 33.95%. With an Earnings Per Share (EPS) of 10.48, the question arises: Is the stock modestly undervalued? Read on for a comprehensive valuation analysis of Adobe Inc (ADBE).
Company Overview
Adobe provides content creation, document management, and digital marketing and advertising software and services. It caters to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices, and media. The company operates in three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).
Adobe's stock price currently stands at $521.79, while the GF Value, an estimation of fair value, is $648.95. This comparison suggests that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
Adobe (ADBE, Financial) appears to be modestly undervalued according to the GF Value. The GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. With its current price of $521.79 per share, Adobe stock gives every indication of being modestly undervalued.
Because Adobe is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Assessing the financial strength of a company before investing in its stock is crucial. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Adobe has a cash-to-debt ratio of 1.61, ranking lower than 58.43% of 2706 companies in the Software industry. However, the overall financial strength of Adobe is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. A company with high profit margins is generally a safer investment than those with low profit margins. Adobe has been profitable 10 times over the past 10 years. Over the past twelve months, the company had a revenue of $18.40 billion and Earnings Per Share (EPS) of $10.48. Its operating margin is 33.64%, which ranks better than 96.33% of 2725 companies in the Software industry. Overall, the profitability of Adobe is ranked 10 out of 10, indicating strong profitability.
One of the most crucial factors in a company's valuation is its growth. According to GuruFocus research, long-term stock performance is closely correlated with growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Adobe is 18.1%, which ranks better than 71.28% of 2392 companies in the Software industry. The 3-year average EBITDA growth is 20.9%, ranking better than 68.56% of 1994 companies in the Software industry.
ROIC vs WACC
Profitability can also be evaluated by comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Adobe's ROIC was 19.6 while its WACC came in at 13.97.
Conclusion
Overall, Adobe (ADBE, Financial) stock gives every indication of being modestly undervalued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 68.56% of 1994 companies in the Software industry. To learn more about Adobe stock, you can check out its 30-Year Financials here.
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