ADBE

Anyone looking at ADBE on this big drop? Down 17% on the announced purchase of Figma for $20 bil in a half cash/half stock deal. The deal is dilutive, and will take several years to show up in earnings, but I’m not sure it’s nearly 20% dilutive. Adobe looked undervalued prior to the real today.

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I’m not sure it’s nearly 20% dilutive

It wiped out more than $20 billion in market cap. If you like the stock before the announced purchase it should still be good to go.

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It wiped out more than $20 billion in market cap. If you like the stock before the announced purchase it should still be good to go.

Absolutely! Adobe is giving away $10b in cash and $10b in stock - no, scratch that, $8b in stock - in exchange for having Figma, and now Adobe’s worth $20b less. In other words, shareholders are essentially attributing less than zero value to Figma, even though Adobe directors presumably thought is was worth $20b. Since the value of Figma is likely to be closer to $20b than to <$0, it seems that Adobe is now a better value than it was before, for a new buyer.

dtb

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Since the value of Figma is likely to be closer to $20b than to <$0, it seems that Adobe is now a better value than it was before, for a new buyer.

Seems like solid reasoning.
The valuation is better.
But is it good?

Certainly a place to look if you’re a fan of the recurring revenue model.

Jim

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Valuation ratios (source: Yahoo! Finance)
P/E trailing 30.19
P/E forward 19.53
P/S trailing 8.84

Looking at historical values of these over the last decade or so (without going through all the historical causes/timings for valuations changes, such as the switch to subscription pricing), and considering the implied growth and future margins, the price looks high to me, despite the recent falls. It might do okay, but I don’t feel that it’s a screaming buy and I’d be concerned that the downside might be as much as 50% if it returns to the low P/S ratio from a few years ago.

The upside is that I think that Adobe does have pricing power due to the high switching costs; if inflation continues then Adobe should be able to raise prices. So an entry price that looks a little high might work out to be a relatively good deal if inflation persists for years rather than months.

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20+ year graphic design professional here. The design community was furious when Adobe first switched to the SaaS model, but user’s begrudgingly migrated to the new payment model. There are no clear strong competitors to Adobe’s core CC offerings (Triad of Illustrator/Photoshop/InDesign) which has created quite the moat. Figma is known for its browser based non-app, collaborative tools (UI/UX/App/Digital). If the purchase goes through and not stopped for antitrust reasons, I’m expecting to see an eventual rollout of those collaborative elements added into Adobe’s core CC offerings. Short term, market freaked out about Adobe’s valuation of Figma at $20B, (while it was at $10B just a year ago). Long term, I see this as a huge win for Adobe, I don’t see them going anywhere. Will be buying more.

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