Adobe Stock (NASDAQ:ADBE): Why Concerns Over Figma are Overblown
Stock Analysis & Ideas

Adobe Stock (NASDAQ:ADBE): Why Concerns Over Figma are Overblown

Story Highlights

Adobe’s Figma acquisition has its variables but will likely bear fruit over the long term. Meanwhile, investor focus has shifted away from Adobe’s stellar core business.

Adobe (NASDAQ: ADBE) shares plunged last month after reporting mixed third-quarter results. Moreover, investors were rattled after the software giant offered light sales guidance and an unexpected acquisition. Nevertheless, its long-term prospects are incredibly bright. It still faces macro headwinds that could slow down its sales growth and margins in the near term, but it’s expected to bounce back from these challenges over time with its robust business model. Hence, we are bullish on ADBE stock.

Investors of ADBE stock have enjoyed several years of massive returns, but the last few months haven’t been easy. Though the going has been tough of late, the bulls will argue that Adobe’s business has weathered multiple economic downturns and stands firm as an industry standard for creative professionals.

The Figma acquisition has been met with mixed reviews so far. Some say they’re excited about all future possibilities, while others express concern over Adobe’s long-term market positioning. Nevertheless, its whopping $20 billion price tag irked investors. However, we feel that the market seems to have overreacted quite dramatically here despite the validity of its concerns. We feel that the bull case is more compelling at this time.

Also, ADBE stock has an 8 out of 10 Smart Score rating, implying that the stock has a solid chance of outperforming the market, going forward.

Adobe: The Market Has it Wrong

Adobe posted record-high revenue of $4.43 billion in its third quarter, a 13% improvement from the prior-year period. The company’s operating income increased 3% year over year to $1.48 billion due largely to higher sales & marketing and research expenses being offset by lower tax charges this time around. However, net income fell by 6%.

Adobe forecasted its fourth-quarter revenue to rise 10% year-over-year to $4.5 billion. However, it projects a 5% drop in earnings per share. The decline is attributed primarily due to foreign exchange headwinds and a weaker macroeconomic environment. Overall though, its guidance is more than decent, considering the current economic climate.

However, the market was focused on Adobe’s major Figma acquisition, an innovative design platform, for $20 billion in cash and stock. The reasoning behind this move was that it wants customer experiences to be improved by integrating both product portfolios.

Adobe’s takeover of Figma effectively removes a major competitor for the company. Several top enterprises use Adobe and Figma’s products, a fragmentation likely to have created long-term problems for Adobe. Moreover, the Figma takeover is expected to bring in $400 million in recurring sales by the end of the year. If ADBE can keep Figma’s retention rate in the neighborhood of 150%, it could add millions in new revenues.

Furthermore, Adobe has been spending a lot of money on buybacks this year, reducing its outstanding share count by nearly 2%. It still has $8.3 billion remaining in its current authorization, which will last for two more years.

Is ADBE Stock a Buy or Sell?

Turning to Wall Street, ADBE stock maintains a Moderate Buy consensus rating. Out of 26 total analyst ratings, 12 Buys, 14 Holds, and zero Sell ratings were assigned over the past three months.

The average ADBE stock price target is $373.30, implying 27.2% upside potential. Analyst price targets range from a low of $310 per share to a high of $540 per share.

Conclusion: ADBE is Solid. Figma Can Create Value

Adobe has been one of the best tech companies for many years. It’s a blue chip with an unbeatable track record and high profit margins. Moreover, the company is a money machine. ADBE has around $5.7 billion in cash and investments as of Q3, generating a whopping $1.7 billion in cash flow in the quarter. However, the acquisition of Figma is not expected to impact Adobe’s long-term positioning significantly. If anything, it will likely create lots of shareholder value over the long term.

The concerns surrounding the acquisition are understandable, but we feel that Adobe’s acquisition wasn’t wrong. Figma is a fast-growing business and a leader in the burgeoning market, which will improve the quality of Adobe’s products. It would’ve been better for Adobe to have developed these technologies in-house, but overall, the takeover decision is likely to pay off in a big way.

Adobe remains one of the most reputable companies in this industry, regardless of the Figma takeover. The market’s focus on its price has clouded over what matters – Adobe’s strong core business, which continues to fire.

Additionally, ADBE stock has gotten significantly cheaper in the past year. Though it trades at roughly 21x forward earnings (using Fiscal 2022 estimates), it is more appealing than other pricey cloud stocks. Investors might be tempted to wait for a better entry point, but we believe that its current price is an attractive opportunity to pick up the stock at multi-year lows.

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