Intrinsic value of Adobe Systems - ADBE

Previous Close

$175.64

  Intrinsic Value

$312.51

stock screener

  Rating & Target

str. buy

+78%

Previous close

$175.64

 
Intrinsic value

$312.51

 
Up/down potential

+78%

 
Rating

str. buy

*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 86.6

 

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
  25.80
  23.72
  21.85
  20.16
  18.65
  17.28
  16.05
  14.95
  13.95
  13.06
  12.25
  11.53
  10.87
  10.29
  9.76
  9.28
  8.85
  8.47
  8.12
  7.81
  7.53
  7.28
  7.05
  6.84
  6.66
  6.49
  6.34
  6.21
  6.09
  5.98
Revenue, $m
  5,854
  7,364
  9,111
  11,102
  13,340
  15,828
  18,563
  21,543
  24,764
  28,219
  31,904
  35,813
  39,941
  44,285
  48,840
  53,607
  58,583
  63,770
  69,170
  74,788
  80,629
  86,699
  93,007
  99,563
  106,377
  113,460
  120,828
  128,493
  136,471
  144,781
  153,438
Variable operating expenses, $m
 
  3,123
  3,735
  4,433
  5,218
  6,091
  7,050
  8,095
  9,224
  10,436
  11,728
  12,558
  14,006
  15,529
  17,126
  18,797
  20,542
  22,361
  24,255
  26,225
  28,273
  30,401
  32,613
  34,912
  37,301
  39,785
  42,369
  45,056
  47,854
  50,768
  53,804
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
  4,978
  5,637
  6,382
  7,216
  8,139
  9,149
  10,247
  11,429
  12,696
  14,045
  14,933
  16,440
  18,024
  19,683
  21,418
  23,229
  25,115
  27,078
  29,119
  31,239
  33,441
  35,729
  38,106
  40,575
  43,141
  45,809
  48,582
  51,468
  54,472
  57,601
Operating income, $m
  1,494
  2,386
  3,474
  4,719
  6,124
  7,689
  9,414
  11,297
  13,334
  15,523
  17,859
  20,880
  23,502
  26,261
  29,157
  32,188
  35,353
  38,654
  42,092
  45,670
  49,390
  53,258
  57,278
  61,457
  65,802
  70,319
  75,019
  79,911
  85,004
  90,309
  95,838
EBITDA, $m
  1,826
  2,984
  4,085
  5,346
  6,768
  8,353
  10,099
  12,005
  14,067
  16,283
  18,648
  21,158
  23,812
  26,605
  29,536
  32,604
  35,808
  39,150
  42,630
  46,251
  50,016
  53,931
  58,000
  62,230
  66,628
  71,201
  75,958
  80,909
  86,064
  91,433
  97,030
Interest expense (income), $m
  66
  66
  114
  169
  232
  302
  381
  467
  561
  663
  772
  888
  1,011
  1,141
  1,278
  1,422
  1,572
  1,729
  1,893
  2,063
  2,240
  2,425
  2,616
  2,815
  3,022
  3,237
  3,460
  3,692
  3,934
  4,186
  4,448
Earnings before tax, $m
  1,435
  2,320
  3,360
  4,550
  5,892
  7,387
  9,033
  10,830
  12,773
  14,860
  17,088
  19,992
  22,490
  25,120
  27,879
  30,766
  33,781
  36,925
  40,200
  43,607
  47,150
  50,833
  54,662
  58,642
  62,780
  67,083
  71,559
  76,219
  81,070
  86,123
  91,390
Tax expense, $m
  266
  626
  907
  1,229
  1,591
  1,994
  2,439
  2,924
  3,449
  4,012
  4,614
  5,398
  6,072
  6,782
  7,527
  8,307
  9,121
  9,970
  10,854
  11,774
  12,730
  13,725
  14,759
  15,833
  16,951
  18,112
  19,321
  20,579
  21,889
  23,253
  24,675
Net income, $m
  1,169
  1,694
  2,453
  3,322
  4,301
  5,392
  6,594
  7,906
  9,324
  10,848
  12,474
  14,594
  16,418
  18,337
  20,351
  22,459
  24,660
  26,955
  29,346
  31,833
  34,419
  37,108
  39,903
  42,809
  45,829
  48,971
  52,238
  55,640
  59,181
  62,870
  66,715

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
  9,979
  12,346
  15,043
  18,076
  21,447
  25,153
  29,191
  33,555
  38,237
  43,230
  48,527
  54,121
  60,007
  66,179
  72,638
  79,380
  86,409
  93,727
  101,339
  109,253
  117,479
  126,026
  134,909
  144,142
  153,740
  163,723
  174,109
  184,921
  196,180
  207,911
Adjusted assets (=assets-cash), $m
  7,932
  9,979
  12,346
  15,043
  18,076
  21,447
  25,153
  29,191
  33,555
  38,237
  43,230
  48,527
  54,121
  60,007
  66,179
  72,638
  79,380
  86,409
  93,727
  101,339
  109,253
  117,479
  126,026
  134,909
  144,142
  153,740
  163,723
  174,109
  184,921
  196,180
  207,911
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
  1,075
  1,330
  1,621
  1,948
  2,311
  2,710
  3,145
  3,615
  4,120
  4,658
  5,229
  5,831
  6,466
  7,131
  7,827
  8,553
  9,310
  10,099
  10,919
  11,772
  12,658
  13,579
  14,536
  15,531
  16,565
  17,641
  18,760
  19,925
  21,138
  22,402
Working capital, $m
  3,028
  -2,187
  -2,706
  -3,297
  -3,962
  -4,701
  -5,513
  -6,398
  -7,355
  -8,381
  -9,476
  -10,637
  -11,863
  -13,153
  -14,506
  -15,921
  -17,399
  -18,940
  -20,544
  -22,212
  -23,947
  -25,750
  -27,623
  -29,570
  -31,594
  -33,698
  -35,886
  -38,162
  -40,532
  -43,000
  -45,571
Total debt, $m
  1,892
  3,256
  4,830
  6,624
  8,641
  10,882
  13,347
  16,032
  18,934
  22,048
  25,368
  28,891
  32,611
  36,524
  40,629
  44,924
  49,408
  54,082
  58,948
  64,010
  69,273
  74,743
  80,428
  86,335
  92,474
  98,857
  105,496
  112,403
  119,592
  127,080
  134,881
Total liabilities, $m
  5,272
  6,636
  8,210
  10,004
  12,021
  14,262
  16,727
  19,412
  22,314
  25,428
  28,748
  32,271
  35,991
  39,904
  44,009
  48,304
  52,788
  57,462
  62,328
  67,390
  72,653
  78,123
  83,808
  89,715
  95,854
  102,237
  108,876
  115,783
  122,972
  130,460
  138,261
Total equity, $m
  7,425
  3,343
  4,136
  5,039
  6,056
  7,185
  8,426
  9,779
  11,241
  12,809
  14,482
  16,257
  18,131
  20,102
  22,170
  24,334
  26,592
  28,947
  31,398
  33,949
  36,600
  39,355
  42,219
  45,195
  48,287
  51,503
  54,847
  58,327
  61,948
  65,720
  69,650
Total liabilities and equity, $m
  12,697
  9,979
  12,346
  15,043
  18,077
  21,447
  25,153
  29,191
  33,555
  38,237
  43,230
  48,528
  54,122
  60,006
  66,179
  72,638
  79,380
  86,409
  93,726
  101,339
  109,253
  117,478
  126,027
  134,910
  144,141
  153,740
  163,723
  174,110
  184,920
  196,180
  207,911
Debt-to-equity ratio
  0.255
  0.970
  1.170
  1.310
  1.430
  1.510
  1.580
  1.640
  1.680
  1.720
  1.750
  1.780
  1.800
  1.820
  1.830
  1.850
  1.860
  1.870
  1.880
  1.890
  1.890
  1.900
  1.910
  1.910
  1.920
  1.920
  1.920
  1.930
  1.930
  1.930
  1.940
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
  1,694
  2,453
  3,322
  4,301
  5,392
  6,594
  7,906
  9,324
  10,848
  12,474
  14,594
  16,418
  18,337
  20,351
  22,459
  24,660
  26,955
  29,346
  31,833
  34,419
  37,108
  39,903
  42,809
  45,829
  48,971
  52,238
  55,640
  59,181
  62,870
  66,715
Depreciation, amort., depletion, $m
  332
  598
  611
  627
  644
  664
  685
  708
  733
  760
  788
  278
  310
  344
  379
  416
  455
  495
  537
  581
  626
  673
  722
  773
  826
  881
  938
  998
  1,060
  1,124
  1,192
Funds from operations, $m
  2,520
  2,291
  3,064
  3,948
  4,945
  6,056
  7,279
  8,614
  10,057
  11,608
  13,262
  14,873
  16,728
  18,681
  20,731
  22,875
  25,115
  27,451
  29,883
  32,414
  35,046
  37,782
  40,626
  43,582
  46,655
  49,852
  53,177
  56,637
  60,241
  63,994
  67,906
Change in working capital, $m
  320
  -449
  -519
  -591
  -665
  -739
  -812
  -885
  -956
  -1,026
  -1,094
  -1,161
  -1,226
  -1,290
  -1,353
  -1,416
  -1,478
  -1,541
  -1,604
  -1,669
  -1,735
  -1,803
  -1,874
  -1,947
  -2,024
  -2,104
  -2,188
  -2,277
  -2,370
  -2,468
  -2,571
Cash from operations, $m
  2,200
  2,740
  3,583
  4,540
  5,610
  6,795
  8,092
  9,499
  11,014
  12,634
  14,357
  16,034
  17,954
  19,971
  22,084
  24,291
  26,593
  28,991
  31,487
  34,082
  36,780
  39,585
  42,499
  45,529
  48,679
  51,956
  55,365
  58,914
  62,610
  66,462
  70,478
Maintenance CAPEX, $m
  0
  -46
  -57
  -71
  -86
  -104
  -123
  -144
  -167
  -192
  -219
  -248
  -278
  -310
  -344
  -379
  -416
  -455
  -495
  -537
  -581
  -626
  -673
  -722
  -773
  -826
  -881
  -938
  -998
  -1,060
  -1,124
New CAPEX, $m
  -204
  -219
  -255
  -291
  -327
  -363
  -399
  -435
  -470
  -504
  -538
  -571
  -603
  -634
  -665
  -696
  -727
  -757
  -788
  -820
  -853
  -886
  -921
  -957
  -995
  -1,034
  -1,076
  -1,119
  -1,165
  -1,213
  -1,264
Cash from investing activities, $m
  -960
  -265
  -312
  -362
  -413
  -467
  -522
  -579
  -637
  -696
  -757
  -819
  -881
  -944
  -1,009
  -1,075
  -1,143
  -1,212
  -1,283
  -1,357
  -1,434
  -1,512
  -1,594
  -1,679
  -1,768
  -1,860
  -1,957
  -2,057
  -2,163
  -2,273
  -2,388
Free cash flow, $m
  1,240
  2,475
  3,271
  4,178
  5,197
  6,328
  7,569
  8,919
  10,376
  11,937
  13,600
  15,215
  17,073
  19,027
  21,075
  23,216
  25,450
  27,779
  30,203
  32,725
  35,347
  38,072
  40,905
  43,849
  46,911
  50,095
  53,408
  56,856
  60,448
  64,189
  68,089
Issuance/(repayment) of debt, $m
  0
  1,364
  1,574
  1,794
  2,017
  2,241
  2,465
  2,685
  2,902
  3,114
  3,320
  3,522
  3,720
  3,914
  4,105
  4,295
  4,484
  4,674
  4,866
  5,062
  5,263
  5,470
  5,684
  5,907
  6,140
  6,383
  6,638
  6,907
  7,190
  7,487
  7,801
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
  1,364
  1,574
  1,794
  2,017
  2,241
  2,465
  2,685
  2,902
  3,114
  3,320
  3,522
  3,720
  3,914
  4,105
  4,295
  4,484
  4,674
  4,866
  5,062
  5,263
  5,470
  5,684
  5,907
  6,140
  6,383
  6,638
  6,907
  7,190
  7,487
  7,801
Total cash flow (excl. dividends), $m
  135
  3,839
  4,845
  5,972
  7,214
  8,569
  10,034
  11,605
  13,278
  15,051
  16,920
  18,737
  20,793
  22,941
  25,180
  27,510
  29,934
  32,453
  35,069
  37,787
  40,610
  43,542
  46,589
  49,756
  53,051
  56,478
  60,047
  63,763
  67,637
  71,676
  75,890
Retained Cash Flow (-), $m
  -423
  -683
  -793
  -904
  -1,016
  -1,129
  -1,242
  -1,353
  -1,462
  -1,569
  -1,673
  -1,774
  -1,874
  -1,972
  -2,068
  -2,163
  -2,259
  -2,355
  -2,451
  -2,550
  -2,651
  -2,756
  -2,863
  -2,976
  -3,093
  -3,216
  -3,344
  -3,479
  -3,622
  -3,772
  -3,930
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
 
  7,921
  4,052
  5,068
  6,198
  7,440
  8,792
  10,252
  11,816
  13,482
  15,247
  16,963
  18,919
  20,969
  23,112
  25,347
  27,675
  30,098
  32,618
  35,237
  37,958
  40,787
  43,726
  46,781
  49,958
  53,263
  56,702
  60,284
  64,015
  67,905
  71,961
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
 
  7,595
  3,709
  4,411
  5,104
  5,767
  6,381
  6,926
  7,386
  7,745
  7,994
  8,055
  8,074
  7,973
  7,759
  7,441
  7,033
  6,549
  6,007
  5,425
  4,823
  4,219
  3,628
  3,066
  2,544
  2,072
  1,654
  1,294
  990
  741
  542
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 is a software company. The Company offers products and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring, optimizing and engaging with compelling content and experiences. It operates through three segments: Digital Media, Digital Marketing, and Print and Publishing. 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. Its Digital Marketing segment provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. Its Print and Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to its legacy type and original equipment manufacturer (OEM) printing businesses.

FINANCIAL RATIOS  of  Adobe Systems (ADBE)

Valuation Ratios
P/E Ratio 74.3
Price to Sales 14.8
Price to Book 11.7
Price to Tangible Book
Price to Cash Flow 39.5
Price to Free Cash Flow 43.5
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 25.8% 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 492.94 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 $86.6 billion.

Management's discussion and analysis

ACQUISITIONS

During fiscal 2015, we completed our acquisition of privately held Fotolia, a leading marketplace for royalty-free photos, images, graphics and HD videos, for $807.5 million. During fiscal 2015, we integrated Fotolia into our Digital Media reportable segment.
We also completed other immaterial business acquisitions during the fiscal years presented. Pro forma information has not been presented for any of our fiscal 2016, 2015 and 2014 acquisitions as the impact to our Consolidated Financial Statements was not material.
Subsequent to December 2, 2016, we completed our acquisition of TubeMogul, a publicly held video advertising platform company, for approximately $549 million in cash consideration, as well as the assumption of certain employee equity awards. The initial purchase accounting for this transaction has not yet been completed given the short period of time between the acquisition date and the issuance of these financial statements. TubeMogul will be integrated into our Digital Marketing reportable segment for financial reporting purposes in the first quarter of fiscal 2017.

Overview of 2016

For fiscal 2016, we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Marketing, while continuing to market and license a broad portfolio of products and solutions.
In our Digital Media segment, we are a market leader with Adobe Creative Cloud, our subscription-based offering for creating and publishing content and applications. Creative Cloud delivers value through frequent product updates, storage and access to user files stored in the cloud with syncing of files across users' machines, access to marketplace, social and community-
based features with our Adobe Stock and Behance services, app creation capabilities and affordable point pricing for cost-sensitive customers.
We offer Creative Cloud for individuals, students, teams and enterprises. These Creative Cloud offerings address the multiple routes to market we use to license our creative software to targeted customers. Adoption of Creative Cloud has transformed our business model, and we continue to expect this to drive higher long-term revenue growth through an expansion of our customer base by acquiring new users through a lower cost of entry and delivery of additional features and value, as well as keeping existing customers current on our latest release. We have also built out a marketplace for Creative Cloud subscribers to enable the delivery and purchase of stock content in our Adobe Stock service. Overall, our strategy with Creative Cloud is designed to enable us to increase our revenue with users, attract more new customers, and grow a recurring and predictable revenue stream that is recognized ratably.
We continue to implement strategies that will accelerate awareness, consideration and purchase of subscriptions to our Creative Cloud offerings. These strategies include increasing the value Creative Cloud users receive, such as offering new mobile applications, as well as targeted promotions and offers that attract past customers and potential users to try out and ultimately subscribe to Creative Cloud. Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products is now immaterial to our business.
We are also a market leader with our Adobe Document Cloud offerings built around our Acrobat family of products, the Adobe Reader and a set of integrated cloud-based document services, including Adobe Sign. Adobe Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type. Adobe Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enables users to create, review, approve, sign and track documents whether on a desktop or mobile device. Adobe Acrobat DC, with a touch-enabled user interface, is offered both through subscription and perpetual licenses.
Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment. ARR should be viewed independently of revenue, deferred revenue and unbilled deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items. We adjust our reported ARR on an annual basis to reflect any material exchange rates changes. Our reported ARR results in fiscal 2016 are based on currency rates set at the start of fiscal 2016 and held constant throughout the year. We calculate ARR as follows:
Creative ARR
Annual Value of Creative Cloud Subscriptions and Services
+
Annual Digital Publishing Suite Contract Value
+
Annual Creative ETLA Contract Value
Document Cloud ARR
Annual Value of Document Cloud Subscriptions and Services
+
Annual Document Cloud ETLA Contract Value
Digital Media ARR
Creative ARR
+
Document Cloud ARR
Creative ARR exiting fiscal 2016 was $3.54 billion, up from $2.50 billion at the end of fiscal 2015. Document Cloud ARR exiting fiscal 2016 was $475 million, up from $385 million at the end of fiscal 2015. Total Digital Media ARR grew to $4.01 billion at the end of fiscal 2016, up from $2.88 billion at the end of fiscal 2015. Revaluing our ending ARR for fiscal 2016 using currency rates at the beginning of fiscal 2017, our Digital Media ARR at the end of fiscal 2016 would be $3.99 billion or approximately $27 million lower than the ARR reported above.
Our success in driving growth in ARR has positively affected our revenue growth. Creative revenue in fiscal 2016 was $3.18 billion, up from $2.30 billion in fiscal 2015 and representing 38% year-over-year growth. Document Cloud revenue in fiscal 2016 was $764.9 million, slightly down from $792.3 million in fiscal 2015 as we continue to transition Document Cloud to a subscription-based model. Total Digital Media segment revenue grew to $3.94 billion in fiscal 2016, up from $3.10 billion in fiscal 2015 and representing 27% year-over-year growth.
We are a market leader in the fast-growing category addressed by our Digital Marketing segment. Our Digital Marketing business provides comprehensive solutions that include analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, audience management, premium video delivery and monetization. We deliver these capabilities through our Adobe Marketing Cloud, an integrated offering enabling marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance. With its broad set of solutions, including Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager, Adobe Campaign, Adobe Audience Manager and Adobe Primetime, as well as real-time dashboards and a collaborative interface, customers of Adobe Marketing Cloud are able to combine data, insights and digital content to deliver a personalized, relevant experience to their constituents.
In addition to chief marketing officers and digital marketers, users of our Adobe Marketing Cloud solutions include marketing professionals such as search engine marketers, media managers, media buyers and marketing research analysts. Customers also include web content editors, web analysts and web marketing managers. These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings and our video workflow and delivery technologies. By combining the creativity of our Digital Media business with the science of our Digital Marketing business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.
We utilize a direct salesforce to market and license our Adobe Marketing Cloud solutions, as well as an extensive ecosystem of partners including marketing agencies, systems integrators and developers that help license and deploy our solutions to their customers. We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments. In fiscal 2016, we achieved record Marketing Cloud revenue of $1.63 billion, which represents 20% year-over-year revenue growth. In December 2016, we acquired TubeMogul and we will integrate TubeMogul in our Digital Marketing business in the first quarter of fiscal 2017. We expect that the addition of TubeMogul and sustained demand across our portfolio of Marketing Cloud solutions will drive revenue growth in future years.
Financial Performance Summary for Fiscal 2016
   
Total Digital Media ARR of approximately $4.01 billion as of December 2, 2016 increased by $1.13 billion, or 39%, from $2.88 billion as of November 27, 2015. The change in our Digital Media ARR was primarily due to increases in the number of paid Creative Cloud and Document Cloud subscriptions, and continued adoption of our ETLAs.
   
Creative revenue of $3.18 billion increased by $873.2 million, or 38%, during fiscal 2016, from $2.30 billion in fiscal 2015. The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings, and to a lesser extent, increases in revenue associated with our Creative Cloud Photography Plan subscription offering.
   
Adobe Marketing Cloud revenue of $1.63 billion increased by $272.7 million, or 20%, during fiscal 2016, from $1.36 billion in fiscal 2015. The increase was primarily due to continued adoption of our Adobe Experience Manager (“AEM”) offering and increases in Adobe Analytics and Adobe Campaign revenue.
   
Our total deferred revenue of $2.01 billion as of December 2, 2016 increased by $529.5 million, or 36%, from $1.49 billion as of November 27, 2015. The increase was primarily due to increases in Creative Cloud individual and team subscriptions, ETLAs and new contracts and renewals for our Adobe Marketing Cloud solutions.
   
Cost of revenue of $819.9 million increased by $75.6 million, or 10%, during fiscal 2016, from $744.3 million in fiscal 2015. The increase was primarily due to increases in costs associated with compensation and related benefits driven by additional headcount and increases in data center costs.
   
Operating expenses of $3.54 billion increased by $392.8 million, or 12%, during fiscal 2016, from $3.15 billion in fiscal 2015. The increase was primarily due to higher costs associated with compensation and related benefits driven by additional headcount.
   
Net income of $1.17 billion increased by $539.2 million, or 86%, during fiscal 2016 from $629.6 million in fiscal 2015 primarily due to subscription revenue growth.
   
Net cash flow from operations of $2.20 billion during fiscal 2016 increased by $730.2 million, or 50%, from $1.47 billion during fiscal 2015 primarily due to higher net income and the increase in deferred revenue.

[Source: Form 10-K dated 2017-01-20]

RELATED COMPANIES Price Int.Val. Rating
MSFT Microsoft 78.81 60.77  sell
SAP SAP ADR 112.03 84.34  sell
ADSK Autodesk 120.81 8.43  str.sell
AAPL Apple 156.25 143.02  hold
ORCL Oracle 49.25 37.14  sell
TYPE Monotype Imagi 21.90 21.87  hold
IBM International 162.07 173.22  hold
CRM Salesforce.com 98.90 91.90  hold

COMPANY NEWS

▶ Adobe shares soar to all-time high with new products, deeper dive into AI   [Oct-19-17 05:16PM  American City Business Journals]
▶ What Happened in the Stock Market Today   [05:02PM  Motley Fool]
▶ Adobe Systems Rockets On 2018 Outlook, Price-Target Hikes   [04:20PM  Investor's Business Daily]
▶ The Hot Stock: The Street Adores Adobe!   [04:15PM  Barrons.com]
▶ S&P 500 Futures: These 5 Top Stocks Are Big Overnight Movers   [07:10AM  Investor's Business Daily]
▶ Adobe Set To Skyrocket Past Buy Point On Bullish Outlook   [Oct-18-17 05:21PM  Investor's Business Daily]
▶ Adobe shares rally after company outlook   [04:31PM  MarketWatch]
▶ Adobe Outlines Growth Strategy at Adobe MAX   [04:05PM  Business Wire]
▶ Adobe Systems Hits 'Air Pocket,' Downgraded On Growth Hopes   [Oct-16-17 04:41PM  Investor's Business Daily]
▶ A Foolish Take: The U.S. Tourism Slump   [03:56PM  Motley Fool]
▶ Dow Leads Stocks As Indexes Crawl To Record Highs Again   [03:07PM  Investor's Business Daily]
▶ Here Are the 4 Fastest-Growing Global Brands   [Oct-11-17 09:34PM  Motley Fool]
▶ 3 Cloud Stocks to Buy Right Now   [12:55PM  Zacks]
▶ It Should Be FAAANG, Not FANG: BofAML   [05:56AM  Investopedia]
▶ Move over 'FANG' stocks, now there's 'FAAANG'   [Oct-02-17 05:17PM  CNBC Videos]
▶ Start of the Q3 Earnings Season   [Sep-27-17 03:50PM  Zacks]
▶ These Tech Stocks Are Near Trade Levels   [09:27AM  Investopedia]
▶ Red Hat Joins Elite Club Of Stocks With RS Ratings Over 90   [03:00AM  Investor's Business Daily]
▶ Stocks Sink, Apple Down Again; Time To Sell These 4 Leaders?   [Sep-25-17 05:00PM  Investor's Business Daily]
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.

FREE DOWNLOAD
Follow us on:   twitter   twitter   twitter   twitter

VALUATION THEORY       ASSET ALLOCATION

About X-FIN       Site news       Privacy policy       Terms of use       FAQ

Copyright © X-FIN.com 2005-2017. All rigths reserved.