Adobe Q4/Fiscal Year 2022 Update

Buy List stock Adobe (ADBE) recently reported their Q4 and fiscal 2022 results.

Overall, the report was good. The firm reported 10% year-over-year revenue growth in Q4, 14% if adjusted for currency effects (the strength of the U.S. dollar accounted for vs. last year). Free cash flow was up a similar percentage. Results were relatively solid across all 3 business units, with Creative Cloud up 8%, Document Cloud growing 16%, and Experience Cloud 14%. There were no big surprises here, all of these are within our estimate range.

Adobe's fiscal year also came in within expectations. Total sales were up 12%, 15% if adjusted for currency. All 3 "clouds" generated over 14% currency-adjusted sales growth. Free cash flow margin was 42%, and Adobe's ongoing share buyback program reduced outstanding shares by 2% for the year. Again, all of this was within our model.

Management is guiding for about 9.5% revenue growth in 2023 at the midpoint. That's a bit lower then our 12% expectation, so I've decreased near-term growth estimates. However, with constant currency growth still expected to be 13%, it is a slight moderation, as currency effects tend to even out over time.

On the up side, I've hiked the long-term free cash margin expectation from 40% to 40.5%. Adobe has averaged a FCF margin of 41.5% over the past 5 years, and I don't see any reason to believe they can't continue that.

Combined with time value of money increases, these model changes lead to a nice jump in our fair value for Adobe. The new fair value price is $548, a $31 dollar or 7.4% increase from the previous target of $517. With Adobe stock still trading down below $340, it looks like a very attractive buy indeed at present.