A solid long-term investment

Adobe’s results for the year ending 3 December 2021 show revenue up 23% to $15.8bn and operating profit up 37% to $5.8bn. The Americas provided 57% of revenue with Europe,the Middle East and Africa at 27% and Asia 16%. Over 92% of revenue is from subscriptions, which gives a measure of stability. Results are reported under two categories: digital media (73% of revenue) and digital experience (27% of revenue). Digital media consists of Creative Cloud (60.5% of sales) and Document Cloud (12.5%) with Experience Cloud (27%) making up the balance.

As part of its 2021 results presentation, Adobe set out its 2022 targets. These included revenues up to £17.9bn, a rise of about 17% (when corrected for 2021’s 53-week financial year), with 2022 earnings per share (EPS) estimated to be $13.70. These targets were slightly below Wall Street’s hopes for $18.16bn sales and $14.26 EPS, so the shares fell, – making Adobe better value.

The share price was $687 at end-November, but has recently fallen to $474. Morningstar estimates fair value as $630, providing a margin of safety for investors. The price/earnings ratio for 2022 is 34.4 falling to 29.2 for 2023, then 25.3 for 2024. There could be further volatility, but Adobe is a sound longterm investment. It has a strong position in a growing market; pricing power; high investment in research and development; a solid record of bolt-on deals to enhance its product range; and its Experience unit is developing into a strong second business. Cash generation is strong, with record operating cash flow of $7.2bn in 2021. The end-December cash balance was $5.8bn with long-term debt of only $4.1bn. It doesn’t pay a dividend but has a programme of share buybacks that support the share price. The company bought 7.2 million shares in 2021.