Is there Value at Adobe?

Adobe Systems (NASDAQ: ADBE); the company that brings us Photoshop and PDFs, has long displayed some of the characteristics of a value investment.

It makes software that is not that sexy, but is widely used and vital to many people. Almost everybody uses PDFs and Flash player, and many professionals rely on solutions like Photoshop every day.

This makes Adobe one of those companies that is all around us, but unseen by a large percentage of the population. That sounds like a classic Buffett value investment to me, but is it?

Does Adobe Make Money?

Simply having the characteristics of a value investment is not enough – a company must also make money to achieve that status. Therefore we must ask ourselves the all-important question does Adobe Systems make money?

Yes, Adobe Systems makes money, according to the financial numbers from July 31, 2016. Some of the highlights of Adobe’s most recent earnings report relied to us via ycharts include:

  • $5.552 billion in revenues.

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  • A net income of $991.87 million.

 

  • A profit margin of 18.5%.

 

  • A free cash flow of $462.67 million.

 

  • Assets of $12.37 billion.

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  • Cash and short-term investments of $4.446 billion.

 

  • $1.959 billion in cash from operations.

The most intriguing of these numbers is the cash and short-term investments that shows that Adobe Systems has a lot of float. It is in a good position to make acquisitions, conduct research and development and expand its product lines.

ADBE is overpriced

Yet there are some real problems at Adobe, its stock was definitely overpriced at $107.39 a share on October 27, 2016. That was proven by the fact that the market cap of $53.4 billion exceeded the enterprise value of $51.68 billion.

This looks like a stock that is headed for a major drop in value soon. Even though it is a really good company, so if you’re looking for a stock to short Adobe might be it.

Despite that I still think Adobe has value potential because of the widespread use of its products and all the cash the company has. It just needs a major drop in share price (probably around 50%) in order to become a true value investment.

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ADBE is overpriced

Average investors should stay away from Adobe for one simple reason it is not necessarily a good income stock.

The company has not paid a cash dividend in over 12 years, since March 16, 2005 to be exact.[1] That was in spite of the obvious fact that Adobe has the resources to pay a cash dividend if its management wanted to.

This means it can only be purchased as a speculative play or a growth stock. As a growth stock, Adobe has some merit, it provided investors with a 13.99% return on equity on July 31, 2016.

If you can afford to buy a stock that provides no dividend income, ADBE is an interesting choice. It has a lot of value potential and some cash despite the lack of dividend.

[1] http://www.nasdaq.com/symbol/adbe/dividend-history