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Adobe Looks Expensive After Raising 14%
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- Solo FIRE
Adobe stock ADBE beats earnings expectation, with revenue grew 10% YoY and EPS grew 15% YoY to $4.48 per share. However the free cash flow (FCF) is flat at $1.899 billion YoY. DCF calculation estimates the value of the stock is about $483 per share, using the following assumptions:
- Latest TTM FCF of $6.369 billion
- FCF growth rate of 11% (5 YR AVG is 11.19%)
- Price/FCF of 30 (5YR AVG is 34 - 35)
- Share buyback of 1.6% annually (5YR AVG is 1.6%)
- Discount rate of 10%
The valuation comes out lower than previously calculated because the company's free cash flow growth has slowed down, and the stock looks a bit overvalued after today's raise.
One concern to look out for is the company spent 2.5 billion to buyback shares, more than what it earned, and they issued 2 billion of debt to cover the gap. This makes sense given the recent low stock prices, however this should not happen again if the stock is trading above the fair value.
Overall, this is a solid quarter for Adobe and although the stock looks expensive, it is still a great business to hold. However I won't be adding more to my positions.
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DISCLAIMER: This post is the author's personal opinion only and none of it should be considered financial advice.