Is Adobe a Value Investment in Software?

Adobe Inc. (NASDAQ: ADBE) could be the best value investment in software or the most over-valued stock around. Notably, Mr. Market priced Adobe shares at $345.05 on 16 January 2020.

However, Adobe’s PDF; or Portable Document Format is one of the most successful digital products of all time. Incredibly, Adobe claims Adobe products opened 250 million PDFs in 2018.

In addition, Adobe claims its Adobe Document Cloud processed were eight billion electronic and digital transactions in 2019. Plus Adobe claims Adobe Scan is the most popular scanning app in Apple iOS with 40 million downloads and 180 million scans.

Additionally, users have downloaded mobile apps from the Adobe Creative Cloud 376 million times. Plus, Adobe claims 90% of the world’s creative professionals use its iconic Adobe Photoshop imaging technology.

Thus, Adobe still makes some of the world’s most widely used software applications. Current Adobe products include Adobe Stock, Adobe XD, InDesign, and Illustrator. Plus the Adobe Experience Cloud platform offers end-to-end products for video and other productions.

Is Adobe Making Money?

Hence, Adobe is still among the most successful software makers ever. But is Adobe making money?

The answer is yes. Adobe (NASDAQ: ADBE) reported making a gross profit of $2.54 billion on revenues of $2.992 billion for the quarter that ended on 30 November 2019. In addition, Adobe reported an operating income of $969.93 million and a net income after tax of $851.96 million for the same quarter.

Stockrow does not report cash flows for Adobes for the last quarter. However, Stockrow reports an ending cash flow of $126.14 million and a $922.64 million operating cash flow for the quarter ending on 31 August 2019.

Adobe had $4.177 billion in cash and short-term investments on 30 November 2019. That number was up from $3.651 billion on 31 August 2019. Thus Adobe is a cash-rich company but I think Mr. Market overprices it.

Is Adobe an Income Investment?

I do not consider Adobe an income stock because it has not paid a dividend since 2005.

However, Adobe could be a growth stock because Stockrow estimates Adobe’s revenues grew at a rate of 21.4% in the quarter ending on 30 November 2019. Interestingly, Adobe has reported revenue growth rates of over 20% for the last five quarters.

For instance, Adobe had a revenue growth rate of 22.83% in the quarter ending on 30 November 2019 and 25% in the quarter ending on 31 May 2019. Consequently, Adobe is a fast-growing company.

Yet I think Mr. Market overprices Adobe because I see nothing in this company’s financial numbers to justify the $345.05 price on 16 January 2020.

What Future Does Adobe Have?

Strangely, Adobe’s future is cloudy because of vast amounts of potential competition.

For example, Apple (NASDAQ: AAPL) CEO Tim Cook claimed the App Store had 20 million registered developers in June 2018, TechCrunch reports. Thus, Apple is a potential Adobe competitor because any of those developers could create a product that could outsell PDFs or Photoshop.

However, Adobe can make money through Apple by selling its products through the App Store. CNBC estimates the App Store generated $50 billion in sales in 2019, so the apps could be a lucrative product for Adobe. Importantly, CNBC claims, developers take 70% of the revenue from App sales.

A far greater menace to Adobe is Microsoft’s (NASDAQ: MSFT) GitHub. GitHub claims 10 million developers joined its Octoverse in 2019. Consequently, GitHub claims over 40 million developers supply software through its platform. Those developers contribute to over 44 million software repositories.

GitHub threatens Adobe because it allows developers to reach customers all over the world. In addition, GitHub allows users to access new products in the form of easy to install code.

Will Adobe Lose its Value?

Therefore, Adobe’s major asset in today’s software market is its brands. To explain, tens of millions of people know and trust PDFs and Photoshop and use them.

However, Adobe faces the challenge of younger customers who are unfamiliar with Adobe products. I think those people will buy cheaper alternatives sold through venues such as GitHub or the App Store.

Given those circumstances, I think older software brands such as Adobe will slowly lose their value. Conversely, I think Adobe will make money and grow for a few more years.

Despite that, I think investors need to avoid Adobe (NASDAQ: ADBE) because Mr. Market overprices it and the stock offers no dividend.