Adobe Inc – Valuations remain expensive December 19, 2023 175

PSR Recommendation: REDUCE Status: Maintained
Target Price: USD465
  • 4Q23 results met our expectations. FY23 revenue/PATMI were at 100%/101% of our FY23e forecasts. 4Q23 PATMI increased 26% YoY to US$1.5bn driven by higher operating leverage, lower taxes, and higher interest income.
  • For FY24e, Adobe expects adj. EPS to grow by 11% YoY to US$17.80 on total revenues of US$21.4bn, up 10% YoY. Management signaled that the AI-related boost and recent price hike for its Creative Cloud offerings would take longer to
  • We maintain a REDUCE recommendation with a higher DCF target price of US$465 (WACC 7.3%, g 4%), up from US$441. We cut our FY24e revenue by 1% to account for lower-than-expected pricing impact, while increasing FY24e PATMI by 3% to reflect lower expenses. However, we believe ADBE valuations remain expensive as its market cap is up about 60% or US$100bn over the last six months on an annual incremental profit opportunity of US$4bn assuming Creative Cloud revenue doubles with its generative AI functionality Firefly.




The Positives

+ Revenue growth driven by Digital Media vertical. 4Q23 revenue grew 12% YoY to US$5.0bn, in line with the company guidance. Digital Media segment revenue rose 13% YoY to US$3.7bn led by higher subscription sales for its creative software applications. Adobe’s Creative Cloud unit, which makes up 80% of Digital Media segment revenues, reported revenue growth of 12% YoY to US$3.0bn. The growth was mainly led by strong demand for its photography and video editing applications (Photoshop and Illustrator). Management highlighted that users have generated over 4.5bn images so far using its generative AI functionality Firefly compared with 3bn in October. Document Cloud revenue grew by 16% YoY to US$721mn (20% of Digital Media revenues) driven by continued demand for PDF and e-signature solutions. Management highlighted that Acrobat Web’s monthly active users, or MAUs, spiked 70% YoY while Acrobat Mobile surpassed 100mn MAUs in the quarter.


+ Improvements in margins. Adobe reported an impressive gross margin of 87% as the company reports the bulk of its sales from recurring revenue. Operating margins expanded 120bps YoY driven by continued focus on operational discipline, including careful investments in research and development as well as sales and marketing. Net margins expanded 340bps YoY driven by higher operating leverage, lower tax expense, and a 2.5x increase in interest income. PATMI rose 26% YoY to US$1.5bn.



The Negative

– Soft FY24e revenue guidance. For FY24e, Adobe expects total revenue to grow 10% YoY to US$21.4bn at the midpoint, which was below our estimate of US$21.8bn. The soft guidance was primarily due to a lower-than-expected impact from the pricing changes. Management highlighted that the price increase in November would impact less than half of the Creative Cloud base and expects a material impact in 2H24e and beyond.

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