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ADBE Up 2100% - Deep Dive

Adobe (ADBE) demonstrated a tremendous earnings report with record figures on both top and bottom lines, but its share price tumbled. Its thriving subscription-based revenue has been powering tremendous consistent top line growth, with financial visibility that possibly justifies it's high valuation. Management raised its guidance, which catalyzed a slew of upwardly revised EPS estimates across every timeline. Despite the outstanding report, investors pulled profits, and with the recent weakness in tech, we've seen the stock slide dramatically.

Even after the decline, our position in ADBE that we opened 10 years back is now sitting at a massive profit of 2100%. Congratulations to our members who have persisted with our belief in this investment and are still Holding it, alongside us!

Q3 2021 Revenue Highlights

The company reported revenues of $3.94B (beat by $40M, up 22% YoY) and GAAP EPS of $2.52 (beat by $0.23, up 28% YoY) with widespread strength in all core Business Segments. Creative Annualized Recurring Revenue (ARR) grew to $9.87B and Document Cloud Annualized Recurring Revenue (ARR) grew to $1.79B.

  • Digital Media Annualized Recurring Revenue (ARR) increased by $455M QoQ to $11.67B.

  • Creative Cloud revenue grew to $2.37B (up 21% YoY), with strong new user acquisition, engagement and renewal across all products and geographies

  • Experience Cloud revenue grew to $985M, with subscription revenue of $864M (up 29% YoY), driven by strong performance across both subscription and professional services.

  • Document Cloud revenue was $493M (up 31% YoY), due to increased unit demand for Acrobat subscriptions globally

It also reported a Margin expansion (88% gross margin versus 87% in the prior year's Q3).

Subscription Revenue

Over the last two years, annual recurring revenue (ARR) for its Digital Media business (its largest) has grown from $8.4B to an expected $12.22B in FQ4 '21. The growth has been relatively consistent over these two years, topping out at 23% growth year-over-year in FQ4 '19 to an expected 20% growth in the upcoming quarter. The amount of recurring revenue is only as good as how much it contributes to overall revenue each quarter. If ARR is a small percentage, it means a vast majority of sales are susceptible to being lost each quarter. However, ADBE has nearly all of its revenue as subscription-based, meaning there's a considerable consistency and predictability factor involved in the company's business.

Source: ADBE Earnings Release

The company has no overhead to run its subscription business. On the subscription side alone, gross margins were 90.5% in the most recent quarter. Two quarters ago it was as much as 91%. This sets up our bull case for ADBE!

Risks - High Valuation

Adobe is trading at its highest overall valuation since the 2000 technology bubble. Slowing business growth rates and rising CPI inflation could squeeze the odds of a successful investment proposition going forward. With an equity capitalization approaching $300 billion today, Adobe is one of the most valuable corporations in the world. From its near-monopoly position in global creative software, gross and net profit margins are highly desirable. However, lofty profit margins could encourage new competition over time. Net profit margins could peak in 2021 if there is an economic slowdown and weigh heavily on the stock price.

Our Stance?

The compelling growth narrative that this leading cloud player has been able to manufacture in recent years leads us to believe that ADBE is still an attractive opportunity even at a high valuation. ADBE is now trading nearly 15% off its all-time high, and we see this as an opportunity to add to our existing winning positions in ADBE or start a new one.

Stay tuned, as there will be more action next week.

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