Investment analysis

Analyst: Paolo Gatto

Reviewer: Tommaso T. Bartolozzi

DATE of the Analysis: 07/02/2025

Ticker: ADBE

Sector: Technology Services

Industry: Packaged Software

CEO: Shantanu Narayen

Target price: 539,2

Opinion: BUY

It operates through the following segments:

• Digital Media: The Digital Media segment offers products and services that enable individuals, teams, businesses, and enterprises to create, publish, and promote content anywhere and accelerate productivity by transforming view, share, engage with and collaborate on documents and creative content.
• Digital Experience: The Digital Experience segment focuses on integrated platform and set of products, services, and solutions that enable businesses to create, manage, execute, measure, monetize, and optimize customer experiences that span from analytics to commerce.
• Publishing and Advertising: The Publishing and Advertising segment includes legacy products and services that address diverse market opportunities, including eLearning solutions, technical document publishing, web conferencing, document and forms platform, web app development, high-end printing, and Adobe Advertising offerings.

Digital media products

Below you will find a list of the main products supplied by each segment:

Creative Cloud:

• Photoshop: Photo editing, digital art, and graphic design.
• Illustrator: Vector graphics, logo design, and typography.
• InDesign: Layout design for print and digital publishing.
• Premiere Pro: Video editing for films, social media, and advertisements.
• After Effects: Motion graphics and visual effects.
• Lightroom: Photo editing and portfolio creation.
• XD: UI/UX design for websites and apps.
• Substance: 3D texturing, rendering, and game design.
• Adobe Stock: Access to stock photos, videos, and templates for creative projects.

Document Cloud:

• Adobe Acrobat: PDF creation, editing, e-signatures, and document collaboration.

Digital experience products

• Adobe Analytics: Tracking and analyzing user behavior on websites and apps.
• Adobe Target: Personalization and A/B testing of marketing strategies.
• Adobe Commerce (Magento): E-commerce solutions for online stores.
• Adobe Experience Manager (AEM): Content management system for websites and applications.
• Marketo Engage: Marketing automation and lead management.
• Adobe Campaign: Planning, orchestrating, and delivering marketing campaigns.

Publishing and Advertising

• Adobe FrameMaker: Creating and managing large, structured documents (e.g., technical manuals).
• Adobe RoboHelp: Authoring help systems and knowledgebases.
• Adobe Advertising Cloud: Managing and automating advertising campaigns across platforms.
• Adobe ColdFusion: Developing and deploying web applications.

Segments, as of 2024:

Digital Experience: $5.37 billion (25% of total revenue) – 5 years growth (+67.3%)

P&A: $275 million (1.3% of total revenue) – 5 years growth (-46%)

Geographical Presence, as of 2024:

US: $11.5 billion – 5 years growth: (+95%)

EMEA: $5.55 billion – 5 years growth: (+86.2%)

APAC: $3.06 billion – 3 years growth: (+20.4%)

Others: $1.41 billion – 5 years growth: (+187%)

MARKET SHARE various segments

Adobe is an absolute leader in the Computer Graphics Industry with a market share of nearly 80%. Moreover, it leads the process management software vendor worldwide (with a market share of nearly 80%).

Possible future drivers of growth

Computer Graphics Market size was valued at USD 34.35 Billion in 2024 and is projected to reach USD 50.7 Billion by 2031, growing at a CAGR of 5.50% from 2024 to 2031.

• Growing Demand in the Gaming Industry: The growth of the gaming sector is a major driver of the computer graphics market. According to a survey published by Newzoo, a prominent games and esports analytics organization, the global games market produced $184.4 billion in sales in 2022, with a forecast increase to $211.2 billion in 2025. 
  
• Expansion of the Animation and Visual Effects Industry: The animation and visual effects industry is a significant user of computer graphics technology. According to Verified Market Research, the global VFX market was worth USD 9446.35 Million in 2023 and is expected to grow to USD 21748.83 Million by 2031.

• Integration of AI in Graphics: The application of artificial intelligence (AI) is changing the computer graphics environment by improving design processes and automating rendering. AI-powered tools simplify workflows, allowing designers to produce more complex images with better efficiency. 
  

income statement

Adobe’s revenues have shown a robust five-year average growth of 14%, reaching $21.52 billion in 2024. The Digital Media segment, which accounts for 73.7% of total revenue, grew by 105.7% over five years, while Digital Experience increased by 67.3%. In contrast, the Publishing and Advertising segment declined by 46%, representing just 1.3% of total revenue. Although EBITDA has grown steadily—averaging 17.7% per year over five years and 9.65% in the past three years—net income growth has decelerated to an average of 5% per year in the recent three-year period (down from 19% over five years), likely due to non-recurring benefits such as COVID-related funds and tax-related adjustments in 2020.

Balance Sheet

Adobe maintains strong liquidity with $7.98 billion in cash and short-term investments, representing 26% of total assets and remaining stable over the past two years. Total receivables, which have trended upward over the past five years, experienced a dip in Q2 2024 before recovering in Q3/Q4—possibly due to seasonal or recognition adjustments. With no inventory on hand, Adobe minimizes the need for high capital expenditures related to storage and PP&E. However, a notable concern is that goodwill constitutes 41.9% of total assets at $12.79 billion, raising questions about the returns on past acquisitions. We are on Damodaran’s side regarding GoodWill!

On the liabilities side, manageable short-term debt of $1.57 billion and stable long-term debt of $4.48 billion, combined with a net debt position of -$1.83 billion, underline a sound balance sheet structure.

Cash Flow Statement

The company’s operating cash flow has consistently grown at about 15% per year over the past five years, with a 10.3% increase recorded this year—driven by stable net income and non-cash adjustments. Investment activities have been marked by significant acquisitions, including $6.31 billion in 2018 and $2.68 billion in 2021, while CAPEX has been trimmed by 40% over three years (from $488 million to $291 million), despite rising revenues—potentially due to efficiencies brought by AI integration. In financing, Adobe has repurchased approximately $27 billion in common shares over the past five years and issued $2 billion in long-term debt in 2023, indicating a strategy to return capital to shareholders while maintaining financial flexibility. Overall, steadily growing free cash flow highlights the company’s robust financial health and its capacity to fund growth initiatives, strategic acquisitions, or shareholder returns.

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rATIOS

Peers Used: Autodesk (ADSK), Unity (U), WIX (WIX)

Price-to-Earnings (P/E) Ratio:

Price-to-Book (P/B) Ratio:

• Adobe: 13.67
• Peers: Generally range between 15 and 30

Return on Equity (ROE):

• Adobe: 36.31% (current), with a five-year average of 36.67%
• Peers: Typically between 24% and 28%

Return on Invested Capital (ROIC):

• Adobe: 28.43% (current), with a five-year average of 28.72%
• Industry Benchmark (NYU Damodaran data): Ranges from 5% to 49.32%

Gross Margin:

• Adobe: 88.26% (current), with a five-year average of 87%
• Peers: Generally range from 60% to 80%

Net Margin:

• Adobe: 30.02% (current), with a five-year average of 28.3%
• Peers: Typically vary from negative margins up to 17%

Final Comment:

These ratios indicate that Adobe consistently outperforms its peers in key profitability and efficiency metrics, reflecting strong operational performance and value creation.

Market Segmentation & Revenue Growth:

• Adobe’s premium pricing may limit its appeal among low- and middle-income retailers, who tend to favor cost-effective or free alternatives like Canva.

• This segmentation could be a contributing factor to the comparatively slower three-year average revenue growth, as Adobe’s high-end offerings target a narrower market.

Generative AI (GenAI) as a Competitive Threat:

• The advent of GenAI presents a potential threat to traditional content production, as innovative AI solutions could disrupt conventional workflows.

• Adobe must strategically integrate AI into its product suite, ensuring that its implementations enhance productivity and maintain the quality expected by its high-end clientele.

Technological and Innovation Risks:

• Rapid technological advancements necessitate continuous innovation; failure to keep pace with evolving consumer demands and technological breakthroughs could result in a loss of competitive edge.

• The cost and complexity of integrating advanced AI solutions and other innovations may strain resources and impact short-term profitability.

Integration and Overvaluation Risk:

• Acquisitions, such as the potential purchase of FIGMA, carry inherent integration risks and may be overvalued, potentially impacting Adobe’s return on invested capital if synergies fail to materialize as expected.

Strenghts:

• Market Share: Adobe maintains a dominant market share across all three of its business segments, solidifying its leadership position in the creative software industry.
• Brand Strength: Adobe is not only a market leader but also a globally recognized brand with strong customer loyalty.
• Product Diversification: A wide range of products across Creative Cloud, Document Cloud, and Experience Cloud enhances revenue streams and reduces dependency on a single product.
• Profit Retention: With an average gross margin of 87.5% over the last five years and a net income margin of 25%, Adobe reinvests substantial capital into growth and innovation.
• R&D Investment: Adobe consistently increases its R&D spending (18% of total revenue) to sustain product innovation and future profitability.
• Financial Stability: A strong balance sheet with increasing cash reserves (26% of total assets), minimal reliance on inventory, and a low debt burden (ST and LT debt < $6 billion, fully covered by cash reserves) ensures financial resilience.
• Key Financial Metrics: High ROIC exceeding WACC, P/FCF of 24.91 (significantly lower than five years ago), impressive free cash flow growth, exceptional margins, and reduced Days Sales Outstanding (DSO) further support Adobe’s financial health.

WEAKNESSES

• Intense Competition: The software industry is highly competitive, with GenAI tools posing a potential threat. Lower-cost competitors like Canva and Figma may erode Adobe’s non-professional customer base.
• Complexity for New Users: Adobe’s professional software suite has a steep learning curve, which may discourage casual users.
• Premium Pricing Model: Adobe’s high subscription fees may limit accessibility for cost-sensitive customers and increase churn risk.
• Revenue Concentration Risk: Key products like Photoshop, Illustrator, and Premiere Pro contribute a significant portion of Adobe’s revenue. A decline in demand for these products could negatively impact overall financial performance.

oPPORTUNITIES

• Generative AI Integration: Expanding AI-powered tools, such as Adobe Firefly, can improve automation, enhance creativity, and attract new users.
• 3D & AR/VR Expansion: Strengthening 3D design offerings (Substance 3D, Aero) can tap into gaming, metaverse, and virtual production markets.
• Enterprise SaaS Growth: Adobe Experience Cloud’s AI-driven marketing, customer analytics, and automation tools present significant revenue growth potential.
• Emerging Market Expansion: Affordable, mobile-first solutions could drive adoption in cost-sensitive regions.
• Strategic Acquisitions: Mergers and acquisitions in AI, cloud collaboration, and automation could reinforce Adobe’s competitive positioning.

THREATS

• AI-Powered Disruption: Generative AI competitors like Midjourney, OpenAI’s DALL·E, and Canva’s AI tools threaten Adobe’s core business.
• Regulatory & Antitrust Risks: Adobe’s blocked Figma acquisition highlights regulatory scrutiny, potentially limiting expansion strategies.
• Freemium & Open-Source Competition: Free alternatives like GIMP, Blender, Krita, and DaVinci Resolve pose threats to Adobe’s market share.
• Subscription Model Fatigue: Customers may seek one-time payment alternatives due to frustration with continuous fees, slowing SaaS adoption.
• Cybersecurity Risks: As a cloud-based enterprise, Adobe faces challenges related to data privacy, breaches, and compliance requirements.

EconomY Of SCALE

• Adobe incurs high fixed costs for software development, but minimal marginal costs for distribution.
• A growing subscriber base enhances pricing power, reinforcing profitability and increasing the ability to reinvest in innovation.
• Risk: Market saturation or new disruptors could pressure pricing and margin stability.

Network Effects

• Adobe PDF is an industry-standard format, widely adopted by businesses and governments.
• Collaboration tools (Adobe Stock, Behance, Adobe Fonts) create an interconnected ecosystem, encouraging continued software use.
• Risk: AI-powered and open-source alternatives may challenge Adobe’s ecosystem dominance.

Switching Costs

• Adobe’s software has a steep learning curve, making migration to alternatives costly in terms of training and workflow adaptation.
• Proprietary file formats (PSD, AI, INDD) create lock-in effects, reducing customer churn.
• Risk: Superior alternative solutions could eventually justify switching costs, leading to market share loss.

Branding

• Adobe is synonymous with professional creative software, commanding premium pricing.
• Industry reliance on Adobe tools for photography, design, and video production reinforces its brand dominance.
• Risk: The rise of AI-powered design platforms and simpler, more accessible tools may reduce the brand’s influence among new creators.

Process power

• Adobe’s AI-driven innovation (Sensei AI) enhances automation and productivity in its creative and enterprise software.
• Deep integration across product suites strengthens user efficiency and retention.
• Risk: Rivals investing in AI (e.g., Canva, Microsoft AI, OpenAI) could erode Adobe’s competitive edge.

Counter Positioning

• Adobe’s strategic investments in AI, cloud services, and marketing analytics differentiate it from legacy software providers. However, we still need to see how the company will implement such changes (i.e. Firefly)
• Risk: If newer, more agile companies introduce disruptive pricing models or technology, Adobe’s premium positioning may be challenged. Competitors such as Canva are positioning to subtract low-end customers to Adobe (customers who do not need hyper professional services)

Cournered Sources

• Exclusive partnerships (thanks to its branding), patents, and deep-rooted enterprise integrations give Adobe a unique edge.
• Risk: The rapid democratization of AI-powered design tools could reduce Adobe’s control over high-margin creative markets.

discounted cash flow:

• Forecast Time: 7 years
• WACC: 10% – Average 5 years (range: 9% – 11%)
• Average Revenue growth: 9.1% (as said by analysts – BMBRG)
• Average EBITDA margin: 46.1%
• Average EBIT margin: 43.4%
• Tax rate: 6% average
• LTGR: 3.5% average
• EBITDA MULTIPLE: industry multiple is 27.8x (NYU), I used 24.8x

Below you will see the sensitivity analysis made for the LTGR result and the EBITDA

With the Industry EBITDA Multiple the results seem skewed (and excessively high due to an possible overvaluation of the overall sector).

That is why the target price will be the average between the two: $539.2

Trading Comps

Peers used for the analysis:

• AUTODESK (ADSK)
• INTUIT (INTU)
• Salesforce (CRM)
• SAP (SAP)
• Wix (WIX)

Results from the Trading Comps:

The maximum will not be taken in consideration due to the absurd numbers (skewed by peers’ multiples, especially on Revenue).

The Average Price for the Trading Comps is: $507.17