Highlights: 

• ADBE earnings growth in the SaaS industry over the past year exceeded by 64.1%
• EBIT has increased by 30% since the beginning of 2020
• DCF Supports a $527 ADBE Stock Forecast for 2021

Overview

Adobe Inc. engages in the provision of digital marketing and media solutions. It operates through the following segments: Digital Media, Digital Experience, and Publishing. The Digital Experience segment provides solutions, including analytics, social marketing, targeting, media optimization, digital experience management, and cross-channel campaign management, as well as premium video delivery and monetization. The Publishing segment includes legacy products and services for eLearning solutions, technical document publishing, web application development, and high-end printing. The company was founded by Charles M. Geschke and John E. Warnock in December 1982 and is headquartered in San Jose, CA. A forward-looking forecast for ADBE stock price for 2021: since the beginning of 2020, EBIT has increased by 30%.

SaaS Market & Adobe: Revenues By 68.2% In Digital Media

Adobe makes money by selling software for creative content and marketing purposes, focusing on user experience. The main operating segment is digital media (revenues 68.2% from all segments). Adobe belongs to the SaaS industry market. What happened to this market because of COVID-19, and what is the forecast for the next few years? Let’s investigate. 

With the growing number of COVID-19 cases, organizations have shifted their priorities. For example, organizations have increased their use of cloud automation and their online presence by developing commercial websites on cloud platforms. In this way, companies have reduced the impact of COVID-19 on productivity and efficiency. Cloud spending rose by 37% (to $29 billion during the first quarter of 2020). This trend is likely to continue as virtual work’s move highlights the relevance for scalable, secure, reliable, and cost-effective external technology services.

SaaS market is expected to grow from $192.1 billion in 2019 to $194 billion in 2020, at a CAGR of 1%. The low growth is mainly due to the slowdown in economic growth in various countries due to the outbreak of COVID-19 and measures to contain it. The market is expected to rebound and grow at a CAGR of 10% from 2021 to $253 billion in 2023. From 2018 to 2022, SaaS Growth is projected to average 15.8% per year.  

 Looking at Adobe Photoshop customers by industry from the figure below, we see that Computer Software is the largest segment. Revenue is expected to show an annual growth rate of 7.4%, resulting in a market volume of $772.449 million by 2025 in the computer software industry. The SaaS industry market tends to grow in the coming years and is a promising investment area. Accordingly, I believe that ADBE’s shares are a good long-term investment.

ADBE Financial Overview: EBIT Is Increased By 30%

Despite the challenging macroeconomic environment, Adobe outperformed both top and bottom-line results for the fourth quarter and forecast growth for the current quarter and fiscal 2021. The pandemic has highlighted the enduring importance of digital technology. Adobe, which offers a wide range of design and multimedia applications, demonstrates that the digital media business is running at full capacity. If we look at Figure 3, we can see, since the beginning of 2020, the company’s share has risen by 30%.

ADBE’s short term assets exceed its both short-term and long-term liabilities by $2.64 billion. Adobe’s liquid assets are well balanced with its total liabilities. While Adobe has obligations to look out for, Adobe has more cash than debt, so it can safely manage its debt. It is also worth noting that Adobe increased its EBIT by 30% last year, easing debt repayments in the future.

According to www.investors.com, the company’s earnings per share will grow by 11% for the full fiscal year 2021 and by another 17% in 2022. Digital experience division, which houses marketing software and services, grew by 12%. Subscription revenue jumped by 21% in 2020 to $11.63 billion. 

As it has been noted, the company has no problems with debt. The pandemic has highlighted the importance of digital technology, which has positively impacted the company’s growth. Adobe Photoshop is on the top first ranking with a market share of 68.33% which is enormous. In second place is Adobe InDesign with a market share of 13.47%. Moreover, Photoshop is used by top big companies like Double Negative Ltd., Entegris Inc, Virginia Polytechnic Institute and State University, Avalanche Studios, Glu Mobile Inc with a minimum average revenue of $100 Million and company size of 1,000 employees. I consider ADBE ‘s stock to be a good long-term investment.

ADBE Stock Forecast: Earnings Growth Exceeded By 64.1%

It is useful to keep an eye on ADBE’s competitors. The competition gives us the tools to quickly adapt to any changes in the competitive landscape and potentially capitalize on industry trends that competitors have not even noticed. Adobe’s Photoshop and Illustrator products make it a digital media leader. Figure 6 shows that the ADBE’s earnings have grown significantly by 32.9% per year over the past 5 years. ADBE earnings growth over the past year exceeded the software industry by 64.1%.

The biggest competitor of Adobe is Microsoft, which is the leader of the SaaS segment holding 17% of the share in a $101 billion market where Adobe ranks third with 10%. Microsoft has annual revenues of $126 billion while Adobe reported $11.2 billion. 

Companies in the sub-industry of “application software” are considered alternatives and competitors to Adobe, including salesforce.com and Oracle. Should we buy ADBE stock or one of its competitors? Let’s investigate it.

In this case, we consider such indicators as ROA, ROE, Net Margins. ROA and ROE together provide a clear picture of management’s effectiveness. If ROA is sound and debt levels are reasonable, a strong ROE is a solid signal that managers are doing a good job of generating returns from shareholders’ investments. Net margins help investors assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead costs are being contained.

From the above we can see that Adobe outperforms its competitors in ROA and Net Margins. The company is second only in ROE: the ROE is less by 49.9% than Oracle. However, as mentioned above, the indicators for the industry are generally high.

Consider the measure of the volatility – Beta. As for salesforce.com, the stock price is 17% more volatile than the S&P 500. Oracle the stock price is 21% less volatile than the S&P 500.  Comparatively, Adobe has a beta of 0.97, meaning that its share price is 3% less volatile than the S&P 500. A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. 

All things considered above allows me to stay in a buying position with ADBE. ADBE has less volatility than the market by 3%, outperforms its competitors in ROA and net margins, and has earnings growth by 64.1% over the past year.

DCF Supports $527 ADBE Stock Forecast For 2021

The process of forecasting the company’s future was made based on past and present data and by analyzing the development trends of this sector of the economy and its policy direction. Adobe Inc.’s property and equipment cost increased from 2018 to 2019 and from 2019 to 2020. Amortization expense decreased in 2020 due to certain intangible assets from previous acquisitions. As of November 2019, working capital was in a deficit primarily due to the reclassification of $2.25 billion term loan due April 2020 and $900 million senior notes due February 2020 to current liabilities. Future cash flows are projected based on historical data combined with a forecast for the next 4 years.

 Adobe’s growth strategy is to dramatically expand its target market to approximately $128 billion by 2022, largely driven by a shift to digital businesses and experiences. The digital business and customer service market will drive Adobe’s growth. The Adobe Experience Cloud available market is expected to reach $84 million by 2022 through customization, content delivery, data, analytics, commerce, advertising, and customer engagement.

Another part of Adobe’s plan is to expand the Creative Cloud market, which is projected to reach $31 billion by 2022. The DCF analysis results show that ADBE’s stock target price should be around $527.  This projected share price makes a $69 more difference from the current share price.

Conclusion:

I take the buy-side on ADBE’s stock because stock holds buy signals from long-term moving averages giving a positive forecast. ADBE shares are up more than 30% since the beginning of 2020. ADBE earnings growth over the past year exceeded the Software industry by 64.1%. ADBE has less volatility than the market by 3%, outperforms its competitors in ROA and Net Margins. EBIT has increased by 30% since the beginning of 2020. Therefore, I consider it a good choice at these current levels for long-term investments, and according to the DCF analysis results, ADBE’s stock target price should be $69 more and will be around $527.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the ADBE stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success With ADBE Stock Prediction

I Know First has been forward-looking with its ADBE in the past. On February 12, 2020, the I Know First algorithm issued a forward-looking forecast for ADBE stock price and recommended ADBE as one of the best consumer stocks to buy. The AI-driven Adobe stock prediction was successful on a 1 year time horizon resulting in more than a 27.72% gain since the forecast date. See the charts below.

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Please note-for trading decisions use the most recent forecast.