Intrinsic value of Adobe Systems - ADBE

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$133.38

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$133.38

 
Intrinsic value

$243.49

 
Up/down potential

+83%

 
Rating

str. buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ADBE stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 66.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  22.06
  22.10
  20.39
  18.85
  17.47
  16.22
  15.10
  14.09
  13.18
  12.36
  11.62
  10.96
  10.37
  9.83
  9.35
  8.91
  8.52
  8.17
  7.85
  7.57
  7.31
  7.08
  6.87
  6.68
  6.52
  6.36
  6.23
  6.10
  5.99
  5.89
  5.81
Revenue, $m
  5,854
  7,148
  8,605
  10,227
  12,014
  13,962
  16,070
  18,334
  20,750
  23,315
  26,025
  28,878
  31,872
  35,005
  38,277
  41,688
  45,240
  48,935
  52,778
  56,771
  60,921
  65,234
  69,716
  74,376
  79,222
  84,264
  89,511
  94,976
  100,669
  106,603
  112,792
Variable operating expenses, $m
 
  3,047
  3,558
  4,127
  4,753
  5,436
  6,176
  6,969
  7,817
  8,716
  9,666
  10,126
  11,176
  12,275
  13,422
  14,618
  15,864
  17,159
  18,507
  19,907
  21,362
  22,874
  24,446
  26,080
  27,779
  29,547
  31,387
  33,303
  35,300
  37,381
  39,551
Fixed operating expenses, $m
 
  1,855
  1,902
  1,949
  1,998
  2,048
  2,099
  2,152
  2,205
  2,260
  2,317
  2,375
  2,434
  2,495
  2,557
  2,621
  2,687
  2,754
  2,823
  2,894
  2,966
  3,040
  3,116
  3,194
  3,274
  3,356
  3,440
  3,526
  3,614
  3,704
  3,797
Total operating expenses, $m
  4,361
  4,902
  5,460
  6,076
  6,751
  7,484
  8,275
  9,121
  10,022
  10,976
  11,983
  12,501
  13,610
  14,770
  15,979
  17,239
  18,551
  19,913
  21,330
  22,801
  24,328
  25,914
  27,562
  29,274
  31,053
  32,903
  34,827
  36,829
  38,914
  41,085
  43,348
Operating income, $m
  1,494
  2,246
  3,146
  4,151
  5,263
  6,478
  7,795
  9,213
  10,728
  12,339
  14,042
  16,377
  18,262
  20,235
  22,297
  24,448
  26,689
  29,022
  31,448
  33,971
  36,593
  39,319
  42,154
  45,102
  48,169
  51,361
  54,684
  58,147
  61,755
  65,518
  69,445
EBITDA, $m
  1,826
  2,842
  3,753
  4,771
  5,896
  7,127
  8,461
  9,896
  11,430
  13,060
  14,785
  16,602
  18,509
  20,507
  22,595
  24,772
  27,041
  29,402
  31,858
  34,412
  37,066
  39,826
  42,695
  45,679
  48,784
  52,015
  55,379
  58,884
  62,537
  66,346
  70,320
Interest expense (income), $m
  66
  66
  107
  153
  204
  261
  322
  389
  460
  536
  617
  702
  792
  887
  986
  1,089
  1,196
  1,308
  1,425
  1,546
  1,672
  1,803
  1,939
  2,080
  2,227
  2,380
  2,539
  2,705
  2,877
  3,057
  3,244
Earnings before tax, $m
  1,435
  2,179
  3,038
  3,998
  5,058
  6,217
  7,473
  8,824
  10,268
  11,802
  13,425
  15,675
  17,469
  19,348
  21,312
  23,360
  25,493
  27,713
  30,023
  32,424
  34,921
  37,516
  40,215
  43,021
  45,941
  48,980
  52,145
  55,442
  58,878
  62,462
  66,201
Tax expense, $m
  266
  588
  820
  1,080
  1,366
  1,679
  2,018
  2,383
  2,772
  3,187
  3,625
  4,232
  4,717
  5,224
  5,754
  6,307
  6,883
  7,483
  8,106
  8,755
  9,429
  10,129
  10,858
  11,616
  12,404
  13,225
  14,079
  14,969
  15,897
  16,865
  17,874
Net income, $m
  1,169
  1,591
  2,218
  2,919
  3,693
  4,539
  5,456
  6,442
  7,496
  8,616
  9,800
  11,443
  12,753
  14,124
  15,558
  17,053
  18,610
  20,231
  21,917
  23,670
  25,492
  27,387
  29,357
  31,406
  33,537
  35,756
  38,066
  40,473
  42,981
  45,597
  48,327

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  4,765
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  12,697
  9,685
  11,660
  13,858
  16,279
  18,919
  21,775
  24,843
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,488
  61,301
  66,308
  71,515
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,178
  121,289
  128,693
  136,408
  144,449
  152,835
Adjusted assets (=assets-cash), $m
  7,932
  9,685
  11,660
  13,858
  16,279
  18,919
  21,775
  24,843
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,488
  61,301
  66,308
  71,515
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,178
  121,289
  128,693
  136,408
  144,449
  152,835
Revenue / Adjusted assets
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
  0.738
Average production assets, $m
  856
  1,044
  1,256
  1,493
  1,754
  2,038
  2,346
  2,677
  3,030
  3,404
  3,800
  4,216
  4,653
  5,111
  5,588
  6,086
  6,605
  7,145
  7,706
  8,289
  8,894
  9,524
  10,179
  10,859
  11,566
  12,302
  13,069
  13,866
  14,698
  15,564
  16,468
Working capital, $m
  3,028
  -2,123
  -2,556
  -3,038
  -3,568
  -4,147
  -4,773
  -5,445
  -6,163
  -6,925
  -7,730
  -8,577
  -9,466
  -10,396
  -11,368
  -12,381
  -13,436
  -14,534
  -15,675
  -16,861
  -18,094
  -19,374
  -20,706
  -22,090
  -23,529
  -25,026
  -26,585
  -28,208
  -29,899
  -31,661
  -33,499
Total debt, $m
  1,892
  3,061
  4,374
  5,836
  7,445
  9,201
  11,100
  13,140
  15,318
  17,629
  20,071
  22,642
  25,339
  28,162
  31,110
  34,184
  37,385
  40,715
  44,177
  47,776
  51,515
  55,401
  59,440
  63,639
  68,006
  72,549
  77,277
  82,201
  87,331
  92,678
  98,255
Total liabilities, $m
  5,272
  6,441
  7,754
  9,216
  10,825
  12,581
  14,480
  16,520
  18,698
  21,009
  23,451
  26,022
  28,719
  31,542
  34,490
  37,564
  40,765
  44,095
  47,557
  51,156
  54,895
  58,781
  62,820
  67,019
  71,386
  75,929
  80,657
  85,581
  90,711
  96,058
  101,635
Total equity, $m
  7,425
  3,245
  3,906
  4,642
  5,453
  6,338
  7,295
  8,322
  9,419
  10,583
  11,814
  13,109
  14,468
  15,890
  17,375
  18,923
  20,536
  22,213
  23,957
  25,770
  27,654
  29,612
  31,646
  33,761
  35,961
  38,250
  40,632
  43,112
  45,697
  48,390
  51,200
Total liabilities and equity, $m
  12,697
  9,686
  11,660
  13,858
  16,278
  18,919
  21,775
  24,842
  28,117
  31,592
  35,265
  39,131
  43,187
  47,432
  51,865
  56,487
  61,301
  66,308
  71,514
  76,926
  82,549
  88,393
  94,466
  100,780
  107,347
  114,179
  121,289
  128,693
  136,408
  144,448
  152,835
Debt-to-equity ratio
  0.255
  0.940
  1.120
  1.260
  1.370
  1.450
  1.520
  1.580
  1.630
  1.670
  1.700
  1.730
  1.750
  1.770
  1.790
  1.810
  1.820
  1.830
  1.840
  1.850
  1.860
  1.870
  1.880
  1.880
  1.890
  1.900
  1.900
  1.910
  1.910
  1.920
  1.920
Adjusted equity ratio
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335
  0.335

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,169
  1,591
  2,218
  2,919
  3,693
  4,539
  5,456
  6,442
  7,496
  8,616
  9,800
  11,443
  12,753
  14,124
  15,558
  17,053
  18,610
  20,231
  21,917
  23,670
  25,492
  27,387
  29,357
  31,406
  33,537
  35,756
  38,066
  40,473
  42,981
  45,597
  48,327
Depreciation, amort., depletion, $m
  332
  596
  607
  620
  634
  649
  665
  683
  702
  722
  743
  224
  248
  272
  297
  324
  351
  380
  410
  441
  473
  507
  541
  578
  615
  654
  695
  738
  782
  828
  876
Funds from operations, $m
  2,520
  2,187
  2,825
  3,539
  4,326
  5,188
  6,121
  7,125
  8,198
  9,337
  10,543
  11,667
  13,000
  14,396
  15,855
  17,376
  18,961
  20,611
  22,327
  24,111
  25,965
  27,894
  29,898
  31,983
  34,152
  36,410
  38,761
  41,210
  43,763
  46,425
  49,203
Change in working capital, $m
  320
  -384
  -433
  -482
  -531
  -579
  -626
  -672
  -718
  -762
  -805
  -847
  -889
  -930
  -972
  -1,013
  -1,055
  -1,098
  -1,141
  -1,186
  -1,233
  -1,281
  -1,331
  -1,384
  -1,439
  -1,497
  -1,559
  -1,623
  -1,691
  -1,763
  -1,838
Cash from operations, $m
  2,200
  2,129
  3,258
  4,021
  4,857
  5,766
  6,747
  7,797
  8,915
  10,099
  11,348
  12,514
  13,889
  15,327
  16,826
  18,389
  20,016
  21,708
  23,468
  25,297
  27,198
  29,174
  31,229
  33,367
  35,592
  37,907
  40,320
  42,833
  45,454
  48,188
  51,041
Maintenance CAPEX, $m
  0
  -46
  -56
  -67
  -79
  -93
  -108
  -125
  -142
  -161
  -181
  -202
  -224
  -248
  -272
  -297
  -324
  -351
  -380
  -410
  -441
  -473
  -507
  -541
  -578
  -615
  -654
  -695
  -738
  -782
  -828
New CAPEX, $m
  -204
  -188
  -213
  -237
  -261
  -284
  -308
  -331
  -353
  -374
  -396
  -417
  -437
  -457
  -478
  -498
  -519
  -540
  -561
  -583
  -606
  -630
  -654
  -680
  -708
  -736
  -766
  -798
  -831
  -866
  -904
Cash from investing activities, $m
  -960
  -234
  -269
  -304
  -340
  -377
  -416
  -456
  -495
  -535
  -577
  -619
  -661
  -705
  -750
  -795
  -843
  -891
  -941
  -993
  -1,047
  -1,103
  -1,161
  -1,221
  -1,286
  -1,351
  -1,420
  -1,493
  -1,569
  -1,648
  -1,732
Free cash flow, $m
  1,240
  1,896
  2,990
  3,717
  4,517
  5,389
  6,331
  7,342
  8,420
  9,564
  10,771
  11,896
  13,228
  14,622
  16,077
  17,594
  19,174
  20,818
  22,527
  24,304
  26,151
  28,072
  30,068
  32,145
  34,307
  36,556
  38,899
  41,340
  43,885
  46,539
  49,309
Issuance/(repayment) of debt, $m
  0
  1,169
  1,313
  1,462
  1,610
  1,756
  1,899
  2,040
  2,177
  2,311
  2,442
  2,571
  2,697
  2,823
  2,948
  3,074
  3,201
  3,330
  3,462
  3,598
  3,739
  3,886
  4,039
  4,199
  4,367
  4,543
  4,729
  4,924
  5,130
  5,347
  5,577
Issuance/(repurchase) of shares, $m
  -1,166
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -1,091
  1,169
  1,313
  1,462
  1,610
  1,756
  1,899
  2,040
  2,177
  2,311
  2,442
  2,571
  2,697
  2,823
  2,948
  3,074
  3,201
  3,330
  3,462
  3,598
  3,739
  3,886
  4,039
  4,199
  4,367
  4,543
  4,729
  4,924
  5,130
  5,347
  5,577
Total cash flow (excl. dividends), $m
  135
  3,065
  4,303
  5,179
  6,126
  7,144
  8,230
  9,382
  10,597
  11,875
  13,213
  14,466
  15,925
  17,445
  19,025
  20,668
  22,375
  24,148
  25,989
  27,902
  29,891
  31,958
  34,107
  36,344
  38,673
  41,099
  43,628
  46,264
  49,015
  51,887
  54,886
Retained Cash Flow (-), $m
  -423
  -585
  -662
  -736
  -811
  -884
  -957
  -1,028
  -1,097
  -1,164
  -1,230
  -1,295
  -1,359
  -1,422
  -1,485
  -1,548
  -1,612
  -1,677
  -1,744
  -1,813
  -1,884
  -1,958
  -2,035
  -2,115
  -2,200
  -2,289
  -2,382
  -2,481
  -2,584
  -2,694
  -2,809
Prev. year cash balance distribution, $m
 
  4,765
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  7,245
  3,642
  4,442
  5,315
  6,260
  7,273
  8,354
  9,500
  10,711
  11,983
  13,171
  14,566
  16,023
  17,540
  19,119
  20,762
  22,470
  24,245
  26,090
  28,007
  30,000
  32,073
  34,229
  36,473
  38,811
  41,246
  43,784
  46,431
  49,193
  52,076
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  6,947
  3,334
  3,866
  4,377
  4,852
  5,279
  5,644
  5,938
  6,153
  6,282
  6,255
  6,216
  6,092
  5,888
  5,613
  5,276
  4,889
  4,465
  4,017
  3,559
  3,103
  2,661
  2,243
  1,858
  1,510
  1,203
  940
  718
  537
  392
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. This segment’s flagship product is Creative Cloud, a subscription service that allows customers to download and install the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers. The company’s Digital Marketing segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, advertising and media optimization, digital experience management, cross-channel campaign management, and audience management solutions, as well as video delivery and monetization to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers. Its Print and Publishing segment offers products and services, such as eLearning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses. The company markets and licenses its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, independent software vendors, retailers, and OEMs. The company was founded in 1982 and is headquartered in San Jose, California.

FINANCIAL RATIOS  of  Adobe Systems (ADBE)

Valuation Ratios
P/E Ratio 56.4
Price to Sales 11.3
Price to Book 8.9
Price to Tangible Book
Price to Cash Flow 30
Price to Free Cash Flow 33
Growth Rates
Sales Growth Rate 22.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 10.3%
Cap. Spend. - 3 Yr. Gr. Rate 1.6%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 25.5%
Total Debt to Equity 25.5%
Interest Coverage 23
Management Effectiveness
Return On Assets 10%
Ret/ On Assets - 3 Yr. Avg. 6.3%
Return On Total Capital 12.8%
Ret/ On T. Cap. - 3 Yr. Avg. 7.8%
Return On Equity 16.2%
Return On Equity - 3 Yr. Avg. 9.8%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 86%
Gross Margin - 3 Yr. Avg. 85.2%
EBITDA Margin 31.3%
EBITDA Margin - 3 Yr. Avg. 25.2%
Operating Margin 25.5%
Oper. Margin - 3 Yr. Avg. 18.1%
Pre-Tax Margin 24.5%
Pre-Tax Margin - 3 Yr. Avg. 17.1%
Net Profit Margin 20%
Net Profit Margin - 3 Yr. Avg. 13.2%
Effective Tax Rate 18.5%
Eff/ Tax Rate - 3 Yr. Avg. 24.1%
Payout Ratio 0%

ADBE stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ADBE stock intrinsic value calculation we used $5854 million for the last fiscal year's total revenue generated by Adobe Systems. The default revenue input number comes from 2016 income statement of Adobe Systems. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ADBE stock valuation model: a) initial revenue growth rate of 22.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ADBE is calculated based on our internal credit rating of Adobe Systems, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Adobe Systems.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ADBE stock the variable cost ratio is equal to 44.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $1810 million in the base year in the intrinsic value calculation for ADBE stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Adobe Systems.

Corporate tax rate of 27% is the nominal tax rate for Adobe Systems. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ADBE stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ADBE are equal to 14.6%.

Life of production assets of 18.8 years is the average useful life of capital assets used in Adobe Systems operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ADBE is equal to -29.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $7425 million for Adobe Systems - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 496.657 million for Adobe Systems is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Adobe Systems at the current share price and the inputted number of shares is $66.2 billion.


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Stock chart of ADBE Financial statements of ADBE
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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