Adobe Inc (ADBE, Financial) has seen a 2.2% daily gain, with a 6.49% increase over the past three months. With an Earnings Per Share (EPS) of 11.11, the question arises: is the stock fairly valued? This article aims to analyze Adobe's valuation, encouraging readers to explore the subsequent analysis for a deeper understanding.
Company Overview
Adobe Inc (ADBE, Financial) is a leading software company that provides content creation, document management, and digital marketing and advertising software and services. Its offerings are widely used by 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 through three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products, which account for less than 5% of revenue.
With a stock price of $521.13 and a market cap of $237.30 billion, it's crucial to compare these figures to Adobe's GF Value, an estimation of the stock's fair value. This comparison will pave the way for an in-depth exploration of the company's value, integrating financial assessment with essential company details.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock, derived from our exclusive method. It is calculated based on historical multiples that the stock has traded at, the GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance.
According to GuruFocus Value calculation, Adobe (ADBE, Financial) is believed to be fairly valued. This suggests that the long-term return of Adobe's stock is likely to be close to the rate of its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Assessing Adobe's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Adobe has a cash-to-debt ratio of 1.84, which ranks worse than 55.57% of 2721 companies in the Software industry. Based on this, GuruFocus ranks Adobe's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. Adobe has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $18.90 billion and Earnings Per Share (EPS) of $11.11. Its operating margin is 33.95%, which ranks better than 96.44% of 2756 companies in the Software industry. Overall, GuruFocus ranks the profitability of Adobe at 10 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. The 3-year average annual revenue growth of Adobe is 18.1%, which ranks better than 71.13% of 2397 companies in the Software industry. The 3-year average EBITDA growth rate is 20.9%, which ranks better than 68.61% of 1988 companies in the Software industry.
ROIC Vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Adobe's ROIC is 20.57 while its WACC came in at 14.
Conclusion
In summary, the stock of Adobe (ADBE, Financial) is believed to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 68.61% of 1988 companies in the Software industry. To learn more about Adobe stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
