Looking At Adobe's Q2 2023 Report

Portfolio stock Adobe (ADBE) reported its 2023 Q2 earnings last week. How are things looking?

In a word, good. Revenue was up 10% to $4.8 billion in the quarter. Adjusting for currency effects, that number would be 13% higher. Growth was broad-based across its business units, with each of Creative, Document, and Experience Cloud units reporting double-digit growth rates. Forward growth metrics were also strong, with a 14% increase in both Creative and Document Cloud annual recurring revenue, and an impressive 22% increase in Document Cloud. Adobe's growth engine continues to chug along.

The financial side also continues to be impressive. The firm generated over $2 billion in free cash flow for the quarter, a 9% increase over last year and a strong 42% free cash margin. Adobe spent a billion dollars to repurchase 2.7 million shares in the quarter, an average price of about $370, well below the current $500 quote. Share buybacks are a great thing, IF they are done at good prices and actually reduce share count. To me, the price looks good, and shares declined 3% year-over-year.

Like a lot of companies, Adobe spent a good part of its conference call hyping up its AI efforts. Unlike a lot of companies, though, Adobe actually has a compelling offering in Adobe Firefly, a product for using generative AI to create images from textual descriptions. We will see how much Firefly actually contributes to the business over the long term, but this looks like an intriguing use of generative AI, not just management trying to get a buzzword into their remarks in any way possible.

Finally, the company re-iterated that it expected the Figma deal to close by the end of 2023. There's been a fair bit of regulatory scrutiny around the deal, particularly in Europe.

After updating the model, I'm kicking the fair value estimate up a few bucks to $560 (from a previous $553). Adobe's stock is up almost 50% from our recommendation price, but is still slightly undervalued, in my opinion.