Adobe Stock Is Trading Below Its Fair Value

+6.16%
Upside
566
Market
601
Trefis
ADBE: Adobe logo
ADBE
Adobe

Adobe’s stock (NASDAQ: ADBE) has gained 53% YTD as compared to the 13% rise in the S&P500 index over the same period. Further, ADBE stock is currently trading around $514, which is 13% below its fair value of $594 – Trefis’ estimate for Adobe’s valuation.

Interestingly, Adobe stock had a Sharpe Ratio of 0.8 since early 2017, which is higher than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.25 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The company surpassed the consensus estimates in the third quarter of FY2023 (FY Dec 4 – Dec 3), with revenues increasing 10% y-o-y to $4.89 billion. It was driven by an 11% growth in digital media and a 10% rise in digital experience revenues. Notably, the subscription-based revenues contributed close to 94% of the top line. On the cost front, the operating margin increased from 33.5% to 34.7% in the quarter, leading to a net income of $1.4 billion – up 24% y-o-y.

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The top line grew 10% y-o-y to $14.4 billion in the nine months of FY 2023. It was primarily driven by an 11% rise in subscription-based revenues. However, total expenses as a % of revenues witnessed an unfavorable increase over the same period. Markedly, the operating margin reduced from 37.8% to 34.2%. Overall, the net income increased 10% y-o-y to $3.9 billion. 

Moving forward, the firm expects the fourth quarter revenues and earnings to remain between $4.96-$5.03 billion and $3.10-$3.15 (GAAP) respectively. Altogether, Adobe’s revenues are forecast to touch $19.38 billion in FY2023. Further, ADBE’s net income margin is likely to see a slight increase in the year. It will likely result in a net income of $5.4 billion and an annual GAAP EPS of $11.63. This coupled with a P/E multiple of just above 51x will lead to a valuation of $594.

 Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 ADBE Return -8% 53% 399%
 S&P 500 Return -4% 13% 93%
 Trefis Reinforced Value Portfolio -6% 23% 534%

[1] Month-to-date and year-to-date as of 9/22/2023
[2] Cumulative total returns since the end of 2016

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