Adobe: Beneficiary Of Digitalization And Content Creation Trends

Adobe Inc. (NASDAQ: ADBE) is one of the largest and most diversified companies specializing in the production of software for digital content creation (graphics, illustrations, photographs, animation, video, 3D visualizations, documents), as well as for managing content creation processes and coordinating development teams and marketing software in the digital environment. It has history since 1982 and millions of users worldwide. Adobe has created such software milestones as Photoshop and pdf-format.

Adobe has strong growth drivers:
  • Rising of social media usage (Jan2021 vs. Jan2020: +13.2%) and grow of serial production led to higher demand for professional tools for making content with video and images by official media, bloggers and other content makers for Instagram, YouTube, TikTok, Netflix. Only Adobe built developed ecosystem for video creation which can be reached in cloud. Development of service industry and small businesses requires more advertisement in media and social media via video or pictures (US social media ad estimated spending in 2021: 21.3%).
  • Spread of VR and AR contents for typical households leads to higher demand for creating software for 3D content creation (projected AR CAGR of 44% from 2021 to 2028, projected VR CAGR of 49% from 2021 to 2026).
  • Electronic signatures are developing since laws are changing around the world and eSignatures are legally approved in many countries, including mobile offerings (projected CAGR of global digital signature market from 2020 to 2026: 31%).

Investment in Adobe creates exposure to worldwide digitalization process with wide market of electronic signatures. Simultaneously, Adobe employs a range of opportunities from content creation trend. Despite its dominant market position, Adobe is not under regulator’s scrutiny. In our opinion, this pressure will be absent in future, due to specifics of company's activities.

Adobe has consistently met and exceeded “the Rule of 40” (net margin + revenue growth) and it is reflected in valuation multiples. Valuation of P/E 49x seems questionable, but for Adobe it’s not uncommon. The valuation was significantly greater than 50x in the past due to its high growth opportunities.

At a time of widespread pressure on tech companies, Adobe is one of few opportunities for exposure to digitalization without pressure from government regulation. Which, among other things, explains high valuation multiples. As experience of 2018 shows, during the rate hike, Adobe declined faster than market, while recovering faster, which is typical for a long-duration company. In our opinion, investment in Adobe is interesting for long-term horizon, especially if valuation will be near 40.

Watch our in-depth company review on Seeking Alpha: Adobe: Beneficiary Of Digitalization And Content Creation Trends