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Adobe $ADBE: Anti-Bubble SaaS
An article by • Published Mar 20, 2021
With all the talk of bubbles in SaaS and technology, it makes sense to highlight Adobe $ADBE in order to frame these discussions. Names like ADBE and $MSFT that trade north of 10x sales, may help provide loose valuation "floors" for higher-growth SaaS.
ADBE is admittedly best-in-breed so there is some cherry picking taking place, but its hard to see bubbles with these kind of growth and FCF metrics. Adobe trades at 13x trailing sales today. At 10x trailing Adobe would be trading at a 4.8% FY21 FCF yield, with top-line growing 15-20%, likely with several years of +/- 15% sales growth in front of it. Outside of market-wide crashes, its seems unrealistic to think ADBE should trade below 10x sales given its FCF metrics and underlying fundamentals growth drivers in its business.
Current enterprise value of $168 billion
Trailing revenue of $12.9 billion (13.1x trailing sales)
Trailing free cash flow of $5.3 billion (31.6x trailing FCF)
Trailing FCF yield of 3.2%
Fiscal 2021 revenue guidance of $15.15 billion, +17.7%
Fiscal 2021 FCF of $6.3 billion (26.9x forward FCF; using revenue guide and 2020 FCF Margin)
Forward FCF yield of 3.7%

Adobe Inc.

Adobe Inc. $ADBE offers products and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, measuring, optimizing and engaging with compelling content and experiences. It operates through three segments: Digital Media, Digital Experience and Publishing.
Digital Media - tools and solutions that enable individuals, small and medium businesses and enterprises to create, publish, promote and monetize their digital content
Digital Experience - solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized
Publishing - addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to its legacy type and original equipment manufacturer printing businesses.
Adobe began its Cloud/SaaS/Subscription transition in 2012. Revenue has climbed steadily since. The
for this year is $15.15 billion revenue, +17.7%. For context, Adobe revenue for the year ending November 2015 was just under $5 billion, so the company will triple its revenue in six years.
ADBE had an amazing 49% free cash flow ("FCF") margin last quarter, taking the trailing FCF margin to 41.3%. FCF growth is generally up and to the right and the FCF margin is second only to Zoom Video Communications Inc. $ZM in the universe of software stocks we track. Zoom is 'over-earning' its FCF margin due to outsized growth and upfront payment terms, so ADBE may be the best FCF story in software.
How ridiculously stable and easy to model is ADBE's FCF profile?
Compare the actual quarterly FCF margin (Cash From Operations less Capex), with a Derived FCF Margin (Gross Margin % less Operating Cost as % Revenue + Stock Comp as % Revenue less Capex as % Revenue).
Think about the FCF margin this way - for every $1 of revenue, ADBE converts into $0.40, an insanely good business model.
At its Analyst Day in December 2020,
ADBE discussed that its TAM was expanding faster than revenue
, now up to $147 billion Total Addressable Market in 2023.

Creative Cloud - $41 billion 2023 TAM Opportunity

Document Cloud - $21 billion 2023 TAM Opportunity

Experience Cloud - $85 billion 2023 TAM Opportunity

It is noteworthy that ADBE's top-100 customers in its Experience Cloud business went from $3 million of ARR to $8 million of ARR between FY15 and FY20. Truly impressive.

Additional diligence items

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