Trading Adobe is risky as it is a questionable business for Figma – RealMoney | Jewelry Dukan

First, Bloomberg News broke the story that Adobe Inc. (ADBE) was on the verge of acquiring Figma, a privately held San Francisco-based online design software provider. Then the news came. Adobe had agreed to a half stock, half cash deal worth about $20 billion to bring Figma on board.

Figma’s platform allows customers to collaborate on software as they develop it. Appealing to individuals and large companies alike, Figma became popular as many tech workers worked from home during the pandemic.

Figma counts among its clients Alphabet (GOOGL), Kimberly Clark (KMB) and Airbnb (ABNB). Adobe anticipates that the cash half of the deal will be funded by cash and, if necessary, in part… by a term loan. Approximately 6 million additional restricted shares will be granted to Figma employees, which will not vest until four years after the closing of the transaction. The transaction is expected to close in 2023. Dylan Fields, Founder and CEO of Figma, will continue to lead the company, which will report to David Wadhwani, Adobe’s President of Digital Media.

Oh, and while Adobe was making announcements, the company released its third-quarter financial results, which were originally due after Thursday’s closing bell.

Adobe reports

I don’t think anyone would describe Adobe’s performance this quarter or the past few quarters as “lousy,” that is… There’s no doubt the company has reached a point where growth is becoming more difficult and worthwhile is get out and buy some growth. For the three months ended September 2, Adobe reported adjusted earnings per share of $3.40 (GAAP earnings per share: $2.42) on sales of $4.433 billion.

While the bottom line beat Wall Street, the top-line number just missed expectations. Revenue rose 12.4% (15% at constant exchange rates) for the quarter, marking the fourth straight quarter of less than 15% growth for the company, which ended after four quarters of growth of 20% or more came.

Looking at the gist, gross profit increased 12.1% to $3.887 billion, while operating expenses rose 18.6% to $2.403 billion. As a result, operating income remained at $1.484 billion (+3%). Cash flow from operations landed at $1.704 billion, up 20.4% from the same period last year. RPO (Remaining Performance Obligations) reached $14.11 billion. The lion’s share of the adjustment ($0.86) to earnings per share came from stock-based and deferred compensation expenses.

segment performance

Digital media

– Segment revenue increased 13% (16% at constant currency) to $3.23 billion.

– ARR (annualized recurring revenue) for new digital media reported at $449 million.

– Total Digital Media ARR ended the quarter at $13.4 billion.

– Creative revenue increased 11% (constant currency: 14%) to $2.63 billion.

Creative ARR grew to $11.15 billion.

– Document Cloud revenue increased 23% (25% in cubic centimeters) to $607 million.

Document Cloud ARR grew to $2.25 billion.

digital experience

– Segment revenue increased 14% (15% at constant currency) to $1.12 billion.

– Digital Experience subscription revenue increased 14% (15% in cubic centimeters) to $981 million.

outlook

For the current (fourth fiscal year) quarter, Adobe sees total revenue of $4.52 billion. That would be good for roughly 10% growth, but it’s below the $4.6 billion Wall Street was aiming for. The Digital Media segment reports revenue growth of 10% (14% in cubic centimeters) and brings in $550 million in net new ARR.

The Digital Experience segment saw revenue growth of 13% (15% in cubic centimeters). GAAP EPS is expected to come in at $2.44 while Adjusted EPS is forecast at $3.50. This is above the $2.45 consensus view.

balance sheet

Adobe ended the quarter with net cash of $5,764 billion and total working capital of $8.489 billion. Current liabilities total $7.438 billion, bringing the company’s current ratio to 1.14. Total assets are US$26.744 billion, including US$14.304 billion in goodwill and other intangible assets. At 53.5% of total assets, that’s approaching a level I’m uncomfortable with. Total liabilities less equity are $12.371 billion, including 4,127 current and non-current debt.

Had it not been for the Figma deal mentioned above, I would have blessed that balance sheet as Adobe could have paid off its entire debt burden out of pocket. Apparently, committing to a $20 billion, half-stock, half-cash deal changes that. The company will have to take on new debt to complete the deal, perhaps the cash half of the deal will be majority borrowed. Adobe repurchased approximately 5.1 million shares of its common stock during the quarter. I haven’t heard anything, but maybe it would be wise to slow down the program.

My thoughts

I would now like to be “all in” with Adobe. The stock is down for the day, down 54.2% from its November 2021 high. However, the shares trade at 27 times forward earnings but can no longer be considered a growth stock. ADBE can increase cash flow and increase profits, growth for the name is yesterday’s roast beef. I like the idea of ​​buying growth. That’s what another former Sarge name, Salesforce (CRM), has become famous for.

As much as I like buying growth when organic growth becomes difficult, I’m unsure about this business. I could be wrong, but isn’t the whole “working from anywhere” thing starting to relax at least? That put Figma on Adobe’s radar. How does a pandemic game fare in a post-pandemic era, if not in a post-pandemic era, then at least in a post-pandemic economic crisis era that is entering or very close to an outright economic recession?

This may work later, but I see a period of adjustment and digestion. ADBE has worked well for me in the past. Past performance is not a guide to future results.

I suspect ADBE will be a decent trader for a while. However, this is difficult for investors. Readers will see that ADBE was in a serious downtrend until June and broke out of this down sloping range in July. This morning’s Gap Down Open puts the stock right back on that trend.

The stock is trading well below all three major moving averages, which means all three of those moving averages will continue to decline. That will deter portfolio managers. Relative strength is more than relative weak. All three components of the daily MACD are negative. It’s really hard to find something I like about this chart.

If I were tempted to take a bullish position on ADBE, I would rather go long January’s $325 calls for about $30 and sell January’s $340 calls for about $24 than buy the stock. This way, instead of putting $320 per share at risk, the trader would be risking a net $6 (x100 per contract) and trying to recover $15. risk management.

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