Is Adobe Stock a no-brainer, down 57% from its peak? – The colorful fool | Jewelry Dukan

A quote widely attributed to famed investor Benjamin Graham describes the market as a voting machine in the short run and a Libra in the long run. Simply put, stocks are often traded on popularity rather than fundamentals in the short term, but over the long term, the most successful companies with the best results rise to the top.

Adobe (ADB -1.15%) The stock has been slaughtered this year and has fallen by more than 50%. Part of that is the result of inflated tech valuations in 2021, part is the flagging economy, and now the acquisition of Figma has angered investors even more.

The voting machine spoke loud and clear; However, when it comes to quality companies, buying when everyone else is selling is often a profitable long-term strategy.

What’s the deal with the Figma acquisition?

Figma is a user interface tool that designers and developers of digital products use to collaborate efficiently and effectively. Projects are shared and changes are automatically saved to the cloud. Figma has become a favorite and is used by well-known software companies like Airbnb, Uber Technologiesand Microsoft, along with smaller companies and independent developers. Its popularity convinced Adobe to make the offer.

And what an offer! Adobe has agreed to pay $20 billion, 50 times Figma’s expected annual recurring revenue at the end of fiscal 2022. That’s hugely expensive, and many analysts have budgeted for it. Did Adobe Pay Too Much? Maybe. But here’s why.

  1. Established companies have to keep their finger on the pulse. Sometimes it is more efficient to buy successful start-ups than to spend billions on research and development yourself.
  2. Figma is a competing product. Integration with the Adobe ecosystem increases revenue and reduces attrition.
  3. Figma’s revenue is currently growing at 100% annually, gross margin is a whopping 90%, and the company is cash flow positive.
  4. Adobe’s resources and large customer base could accelerate Figma’s growth.

What looks like a ridiculous price today could look like a real bargain a few years from now.

How will Adobe pay the $20 billion?

The deal will see $10 billion paid in cash and $10 billion in stock. Adobe has approximately $5.7 billion in cash and investments and generated $1.7 billion in cash for the third quarter of fiscal 2022 ended September 2. The transaction is expected to close in 2023, so cash shouldn’t be an issue. If so, Adobe shouldn’t have any trouble getting a short-term loan.

The equity portion is paid for through the issuance of shares, diluting existing shareholders. That $10 billion represents about 7% of Adobe’s current market cap. However, Adobe repurchased 5.1 million shares for $1.2 billion in the third quarter alone, so shareholders aren’t left to dry here.

Why Adobe; why now?

The market reaction to the Figma price has actually saved investors money if they start accumulating Adobe stock now.

As shown below, the nosedive has slashed Adobe’s market cap by more than $20 billion over the past five days.

ADBE market cap data from YCharts

Adobe is exceptionally profitable, with an operating margin of 35% this fiscal year, thanks to its must-have unique products like Photoshop, Illustrator, and Creative Cloud. The inclusion of Figma will further cement that dominance – albeit at a steep cost.

Adobe’s price-to-earnings (P/E) ratio has fallen to its lowest level in five years, as shown below.

ADBE-PE ratio chart

ADBE P/E data from YCharts

That doesn’t mean everything is rosy. The company has yet to navigate the current inflationary environment that threatens to plunge the economy into recession. Because of these risks and others, it’s always important for investors to employ dollar-cost-average or other risk-mitigating strategies and prepare for a further decline in the stock. Nailing the exact floor is not easy.

It is always darkest before dawn. And it’s gone dark on Adobe’s stock price. Now might be the time for long-term investors to buy stakes in this seedy tech giant.

Bradley Guichard has held positions at Adobe Inc. and Microsoft. The Motley Fool has positions in and recommends Adobe Inc., Airbnb, Inc., and Microsoft. The Motley Fool recommends Uber Technologies and 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.

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