In this bite-sized analysis, we will answer one simple question:

Today, we'll will answer one simple question:

How much can $10,000 in AMC today, grow into in 10 years?

I’ll present the slides first, followed by the qualitative & quantitative bite-sized analysis.

Adobe’s Business Segments

Adobe provides a range of products and services in three main business segments:

1. Digital Media

2. Digital Experience

3. Publishing and Advertising

The Digital Media segment offers creative cloud services and creative applications such as Photoshop, Lightroom and Illustrator. The flagship product is Adobe Creative Cloud. The Digital Experience segment provides marketing and analytics solutions and services, including Adobe Experience Cloud and Adobe Analytics. The Publishing segment provides document cloud services and e-signature solutions, such as Adobe Acrobat, Adobe Sign and Adobe Scan.

Revenue

Revenue has grown from $4.4B in 2012 to $17.6B in 2022.

That's an average of 15.82% in the past 10 years, and Adobe achieved a 15% YoY growth in FY22 alone.

In Q4, Adobe achieved revenue of $4.53 billion, representing 14% year-over-year growth. In their Digital Media business, they had their best quarter ever on net new ARR, delivering $576 million, and their Digital Experience business achieved its first $1 billion subscription revenue quarter, growing 16% year-over-year.

Bulk of their revenue comes from the Digital Media segment, comprising $12.8B in the most recent fiscal year. The best part? Their 96% gross margin! As value investors, we want to know how much Adobe can grow this segment in revenue in the next decade.

Cash flow is flippin' strong. An impressive $7.8B. However, $1.4B was from stock based compensation, which comprises 18% of CFO. I will not deduct it as their share count did not skyrocket and their CFO is strong. We'll talk about that in a minute.

As investors anticipated a ton of growth and cash flow, their market cap has skyrocketed into rich valuation territory in 2021, but has since come down due to the higher interest rate environment.

Their balance sheet is healthy. Debt in this case refer to actual borrowings & more permanent liabilities, like pension liabilties, long term debt & capital lease obligations.

We want Net Debt/EBITDA <3. It's 6976/(5137-4236) = ~0.2.

Diluted shares outstanding has fallen from 503M to 471M, an annualised buyback rate of 6.36%. It's like getting a 6.36% dividend, without taxes. It also means your ownership in the company increases, raising your equity stake in the company.

Time to forecast.

Revenue & EBITDA

Revenue has treaded in the double digit range till this day. Factoring in demand & macro uncertainty, I am forecasting revenue growth of high single digits with a more conservative 35% EBITDA margin (FY2022 was 39.6%).

Cash Flow

I will assume a constant 5% CAPEX compared to CFO due to Adobe's extreme MOAT and asset-light business model. Otherwise, it would be higher to sustain even single digit growth. I am also assuming low net debt issuance due to their healthy balance sheet.

Hence, here is the free cash flow to the equity holder. I am forecasting a lower buyback ratio to account for any capital needed for future CAPEX and acquisitions.

I will apply a 20x EV/EBITDA multiple as Adobe has tons of room to grow, and is extremely asset-light. It is lower than the forward EV/EBITDA multiple of 23.6x even after markets have contracted, so I believe it is reasonable. I get a $542.83 price target in 10 years.

Here's my cash flow distribution for the next 10 years. This will help us find the IRR, which is our annualised rate of return on Adobe.

How much will $10,000 in Adobe turn into?

Using abit of Excel magic, I forecast Adobe to bring in an annualised rate of return of around 12.11%. Keep in mind that this is for a stock price of $323. Adobe has since shot up to $344 (as of Mar 6 2023), which yields 11.14%. Assuming the S&P500 yields 10%, we forecast Adobe to beat the market.

If your margin of safety is higher to adjust for uncertainty within the next decade, 11-12% will be pushed even lower. Thankfully, there are a ton of high double digit returns for stocks that fly under the radar, and we will cover them for you.