Updating Zscaler and Adobe

One more write-up to wrap up all of our followed stocks for Q3. Since we are starting to collect quite a few stocks in the various lists, my plan going forward is not to write each of them up every quarter - only when there is some notable news that moves the fair value estimate by 15% or more (in either direction). That said, I do plan to keep the fair value prices updated every quarter, and do an update write-up for all followed stocks at least once a year.

Let's take a look at the last two stocks to report, Zscaler and Adobe.

Zscaler (ZS)

Great quarter and fiscal year for Zscaler, who reported 43% growth for the quarter and 48% for the full year. Enterprises continue to transition their workflows to externally-hosted cloud solutions, and Zscaler is the perfect security layer for that. The company continues to be seen as a leader in the space, and with a 40% increase in attacks in 2022, security spending is seen as "core and critical" to all enterprise IT departments.

Forward metrics look good too. Deferred revenue grew 41%, foreshadowing strong future growth. Free cash margin for the year came in at 25%, right about on our model. With the firm's continuing consistency, strong recurring revenues, and criticality, I'm lowering the discount rate down to 10.5% from 11%, which moves the fair value number up from $139 to $152, a 9% increase. Zscaler still trades just a shade over that at present, but investors should keep an eye on this one for buying opportunities.

Adobe (ADBE)

Steady but unspectacular Adobe continued its, well, steady but unspectacular performance in Q3, with sales up 10% year-over-year. Both the Digital Media (Adobe's traditional creative and document tools) and Digital Experience (its marketing-based workflow tools) grew about 10%. Free cash margin was at 36% (right on model), and $1 billion in share buybacks contributed to a 2% decline in shares year-over-year (also on model).

Adobe is wonderfully predictable and reliable, and we bought it at a good price. The one wildcard continues to be the $20 billion Figma deal. While the company still reiterates that it expects the deal to close this year, EU and UK probes will probably push that out into 2024. From my perspective, it doesn't really matter a whole lot. I think Adobe certainly overpaid, so the trade off is lost growth vs. a better balance sheet. Either way, I don't think it affects the value of the company a whole lot.

Adobe's fair value gets a slight bump up to $569, from a previous $560.