Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
2022 has been good for some stocks, but terrible for most. One company that would like to slam the door shut on 2022 is Adobe (ADBE -0.24%). The stock is down about 42% year to date, though this drop was exaggerated by the negative market’s reaction to an acquisition Adobe made in September.
Unlike what the market thinks, I believe Adobe is still a top-tier stock and will be adding to my position before 2022 ends. Here’s why I think Adobe is an excellent buy now and could have a great 2023.
On Sept. 15, Adobe announced its acquisition of the collaborative design company Figma. Investors’ main problem with it was the price tag — $20 billion. The company only generates $400 million in annual recurring revenue, which values the acquisition at 50 times sales. That valuation is associated with the inflated tech stock prices of 2021, not the more realistic ones of 2022.
The $20 billion bill will be paid with a mixture of stock and cash. To pay that much, Adobe will need to take on long-term debt and issue enough stock to wipe out its share repurchases over the past six years. This acquisition is out of character for a normally fiscally responsible company, and it raises concerns for some about Adobe’s future.
However, one essential item many investors miss is that the acquisition allowed Adobe to acquire Figma’s collaborative technology. Figma allows multiple people to work on a project simultaneously in the cloud, something you cannot currently do with Adobe’s products. This level of collaboration is something many creators expect in today’s digital society; without it, Adobe would undoubtedly lose market share.
But with the Figma acquisition, Adobe obtained the technology to help it boost its cloud collaboration efforts.
Despite the technology gap, Adobe’s business has been rolling in 2022.
In the third quarter of fiscal 2022 (ending Sept. 2), Adobe’s revenue grew 13% year over year to a company record of $4.43 billion. However, rising operating expenses caused operating profit to only grow by 3%.
Still, that’s not bad execution during a time when many others are seeing operating expenses grow much faster than revenue, which causes operating profits to fall.
Adobe’s free cash flow yield is also at its highest level in nearly a decade.
ADBE Free Cash Flow Yield data by YCharts
This means investors can buy practically twice the amount of free cash flow Adobe generates as they could this time last year or nearly any other time in the past decade. Additionally, with the 10-year Treasury note yielding 3.71%, Adobe has a higher free cash flow yield, which is a sign many investors look at to determine if a stock is undervalued.
Looking toward 2023, analysts project Adobe will grow sales by an average of 10.3%. That’s about the same as the market usually grows on average. However, 2023 will likely not be an average year: Projections for 2023 range from the start of a bull market to the continuation of the bear market. But if Adobe can crank out an average year, investors will likely be thrilled.
Investors will gain further clarity on how Figma will integrate into Adobe throughout 2023, which should ease some fears. Additionally, Adobe’s execution in 2023 is expected to be solid. With the stock currently undervalued, I think Adobe makes an outstanding stock to purchase before 2022 ends.
Keithen Drury has positions in Adobe Inc. The Motley Fool has positions in and recommends Adobe Inc. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite.
