Company Name: Adobe Systems
Entry Price: $464
Target Price: $600
Projected Yield: 29.30%
Time Line: 3 to 6 months
Position Size: 3% to 5%
About Adobe Systems
Adobe Systems, Inc. (ADBE.US) is one of the largest software companies, focusing on Digital Media, Digital Experience and Publishing. Adobe products enable creating and editing media content and managing documents.
The most popular products include Illustrator, Photoshop, XD, After Effects, and InDesign.
What's the Idea?
Capitalize on a stock that may rise with stable demand for the products and new partner arrangements.
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Why Trade Adobe Systems?
Reason 1: A Diversified Product Portfolio with Huge Target Market
Over the last few years, Adobe was consistently in the forefront of content and document software development.
Adobe's products have gained a stable popularity, as they are mutually integrated, which facilitates the work and provides additional opportunities to their users. As such, Adobe has a substantial competitive edge against its closest rivals.
The pandemic was a good thing for Adobe, as the number of subs got boosted with the work-from-home trend in place. In particular, Document Cloud brought 22% more earnings (YoY), while Creative Cloud, the famous package that includes PhotoShop, Illustrator, and Premiere, was up by 19%. The latter is, however, mostly because the content market expanded a lot over the recent years (a trend that is most likely to continue).
The management says that the current economic and social conditions will further stimulate the target market for Adobe, which, by 2023, may reach $147B, including $41B for Creative Cloud, $21B for Document Cloud, and $85 for Experience Cloud. Grand View Research estimates are actually in line with it: up to $152B by 2027, with an annual growth of 17.40%. With such a huge target market, Adobe may well continue boosting its own earnings.
Reason 2: Better Products, More Services and New Partner Agreements
Adobe is continuously improving its services and adding new products, with a special focus on the content creation solutions, where the customers get the most innovative tools. In order to improve its services, Adobe uses AI, which streamlines the content generation process.
In December 2020, Adobe acquired Workfront for $1.50B. Workfront is a SaaS provider focusing on project management tools, which drastically enhance the transparency. With a customer base of over 3,000, it caters to such renowned corporations as Deloitte, Under Armour, Nordstrom, Prudential Financial, T-Mobile, and The Home Depot, among others.
Adobe management appreciates the potential of integrating Experience Cloud (marketing and analysis) with Workfront. The two companies have been working together for long, sharing a customer base of around 1,000 users. This acquisition should help Adobe to get $220M to $240M more in earnings in the shortest term.
On the other hand, Adobe is also focusing on partner agreements. Last year, Alteryx became Adobe's partner, which opened Alteryx' analytical features to Experience Cloud users. Alteryx also announced Marketing Analytics Starter Kit, an analytic tool suite for Adobe, which greatly simplifies marketing research and hypothesis analysis.
Thus, with better products and a larger portfolio, Adobe can not only maintain its retention levels, but also further expand its customer base.
Reason 3: Financial Performance
Last year was very productive for Adobe, as the earnings went up by 15% to reach $12.80B. As for the Non-GAAP, the operation profit margin was at 42.90% against 39.90% a year earlier. Meanwhile, the net profit margin increased to 38.10% against 34.60%, the debt is at $4.10B, and the liquidity equals $6B. The operating cash flow was at a record high of $5.70B over the last year.
The outlook for 2021 by the company management is quite positive, with the growth at 19%, the earnings at $15.10B, and the Non-GAAP EPS at $11.20 against $10.10 in 2020.
The EV/EBITDA and Forward PE are currently at 44x and 35x, respectively. which is acceptable given the projected growth rates and in line with the industry average.
Lately, a few large banks and investment companies have updated their target price prediction, with The Goldman Sachs Group standing for $580, Barclays, for $605, Credit Suisse Group. for $575, and Royal Bank of Canada assuming the price would be at $575.
Adobe's buyback is yet another possible reason for the stock price rise. Shares worth $8B are to be bought in the first six months of 2021, while another round will include a $15B buyback in 2024.
How to Use the Idea?
- Buy Adobe Systems stock at $464.
- Allocate no more than 3-5% of your portfolio amount. To build a balanced portfolio, you can use recommendations by our analysts.
- Sell the stock when the price is at $600 per share.
How to Buy Adobe Systems Shares?
If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.
After opening an account, you can buy shares in either of the following ways:
Freedom24 Web Platform: : In the Web Terminal section, type ADBE.US (Adobe Systems ticker in the NASDAQ) in the search box, and select Adobe Systems, Inc in the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.
Freedom24 iPhone or Android App: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that will show up, type ADBE.US (Adobe Systems ticker in the NASDAQ) and select Adobe Systems, Inc in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.
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*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Cyprus Ltd or its affiliates and/or subsidiaries (collectively Freedom Finance). Freedom Finance do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.