Last time we talked about Adobe Inc. (NASDAQ: ADBE), it was against the backdrop of the biggest bubble in human history. We didn’t mince words on April 10, 2022on the need to run for walk out as if the theater was on fire.
NVIDIA Corporation (NVDA) is still trading at twice the price of the sales multiple it achieved in NASDAQ Peak In 2000.
Adobe Inc. sits right at that peak valuation level and trades at 40X GAAP EPS while expecting 2.5% GAAP revenue growth for 2022. When this bubble fully deflates, everyone will be watching. back with emotion and wish they had sold more.
Source: Adventures in Options Strategies
The good news for ADBE is that despite today’s drop, it still outperforms NVDA.
We look at recent results and tell you it’s not too late to start running for the hills.
At first glance, the results weren’t too bad. The $3.23 billion in revenue for the Digital Media the division was a13% increase more the prior year Where a 16% increase in constant currency. VSactual sales increased by approximately 14% at constant exchange rates. Document Cloud was the star with 25% growth in constant currencies.
These are not numbers that growth investors live for. Unfortunately, there was another “growth” that was less than positive. Total operating expenses jumped 19% to 2.407 billion. Apart from amortization of intangible assets, all categories are up sharply.
This is wage inflation and it continues with a vengeance.
The impact was so severe that GAAP earnings were down 5% year over year ($2.42 vs. $2.52) per share. This despite a monumental effort by the company to reduce the number of shares outstanding. Adobe’s year-long buying spree reduced shares outstanding by about 8 million, yet earnings per share declined. But wait, didn’t the headlines report earnings per share growth?
It’s true. We were all brainwashed to find the non-GAAP number, so yes, this one was up. It would be like your doctor telling you that your heart health was at the top if we adjusted that you ate enough steak to put the cows on the endangered species list. So if we ignore the 79 cents of stock-based compensation in the quarter, we got growth.
But ignoring this stock-based compensation number is just plain wrong. ADBE spends more than $1.4 billion a year just to offset this dilution. You don’t see it, because the total redemption is much higher, and the number of shares is actually decreasing year over year. But it’s an expense, and investors should ignore any analyst who uses the non-GAAP number as a way to call Adobe cheaply.
Adobe is trading at nearly 32 times GAAP earnings. The selling price has changed from the 13.23X we showed in our last coverage and is now below 9.0X.
Our outlook calls for a sharp decline in margins, some of which we have seen this quarter, but which has not yet been reflected in the Y charts above. It’s unclear how far it goes, but we think the tech sector is likely to experience continued headwinds from rapidly rising labor costs and falling demand as the economy is shrinking. This situation is exacerbated by an incredibly strong US dollar. In this environment, the upper limit of what anyone should pay would be 5 times sales. This is equivalent to almost one $100 billion in market capitalization on a stand-alone basis for revenues of $19-20 billion in 2023.
So we have another drop of about 30%, conservatively, on that basis. Unfortunately, things aren’t that bad…
You tend to see this kind of nonsense at the top of the bubble, not when it’s halfway through the implosion. Nonetheless, ADBE decided there was no better time than to buy competitor FIGMA for $20 billion. The stunning price here shows how desperate ADBE was for growth. Half of the amount was in cash and the other half in ADBE shares.
This same stock that ADBE spent $5.33 to buy back at all prices north of here was in the process of being issued. In fact twice as much.
Despite a zero interest rate for the cash portion of the deal and extremely high ADBE equity multiples, the deal would be dilutive in both Years 1 and 2. In fact, we guarantee this will see a huge goodwill related to the agreement – broken down in 2 years. ADBE just paid 50 times sales at the worst possible time.
Perhaps a sign of the times that a stock can drop over 50% from highs and still trade at over 30x GAAP earnings. NVDA, which we mentioned earlier, is down 70% and still trading at over 45 times GAAP earnings. These numbers are crazy, to put it bluntly. Keep in mind that extremes of overvaluation lead to extremes of undervaluation. So whatever you think is fair value, discount it by 20-40% before you think it becomes buyable. This revenue drop from 13X to 9X accounted for 50% of the trip. So we’re halfway there, and Adobe still lives on a prayer.