Updates: Adobe Results, Passing On A Few More Stocks

Adobe Q1 Results

Portfolio stock Adobe (ADBE) recently reported their Q1 results. Results looked good, with 9% year-over-year revenue growth, 13% when backing out currency effects. That growth was broad based, with both the Digital Media and Digital Experience segments posting the same low teen's growth rate. Gross margins and free cash flow margins all remained within our ranges of expectation. It was a solid, if unremarkable, quarter.

One development in the quarter was the Department of Justice (DOJ) suing Adobe over their proposed Figma acquisition on anti-competitive grounds. We will have to see how this develops. On one hand, a lot of investors were not happy about the $20 billion price tag on Figma. On the other hand, bringing Figma in would give Adobe a seriously strong hold on the evolving collaborative UX design software market.

Adobe continues to meet expectations. I'm raising the fair value price a few bucks to $553 (from $548).

Passing on Enphase

Home-scale solar has always been an interesting opportunity. A complete system, in theory, makes a home self-sufficient with electrical power, able to operate "off the grid" for periods of time, and even utilize battery storage to maintain power in the case of a general outage. And, of course, it is environmentally friendly, using zero emissions and satisfying many consumer's desire to "go green". Currently the home solar market is worth about $14 billion, with estimates pegging a $45 billion market by 2030 - a 16% annual growth rate.

Enphase provides key equipment in a home-solar system, notably the "micro-inverters" that convert panel-based DC energy into home-friendly AC. It also provides components such as battery storage and electric vehicle (EV) chargers. Revenue growth has been explosive, with a 4 year compound annual growth rate of over 80%. It is also a profitable business, throwing off over $700 million in free cash flow last year, a margin of 30%. Certainly, this isn't some short-term trend driven Green Screen entrant - this is an interesting, viable business, and those particularly interested in the solar space should consider digging deeper.

My reasons for passing on the stock are several. Solar demand is driven largely through government subsidies and tax breaks at present, which puts it at risk of changing government priorities. Enphase is an equipment seller - these are not recurring sales, and the company would see material sales declines if and when overall demand wanes. I also don't see any particular economic moat. The solar space has a lot of competition, and new technology is being developed rapidly, setting up the risk of obsoleteness for current vendors. All of these risks create too much uncertainty to be confident about a stock price estimate, and for that reason it gets a "pass".

2 More Oil & Gas Eliminations

I've written at length on why the oil & gas sector doesn't make sense for the kind of investing we are attempting here - sustainable long-term revenue growth with a focus on free cash generation. That stance has been validated by the fact that so many of these stocks have already fallen out of the Green Screens due to reduced growth expectations or flagging cash profitability. We want to be especially vigilant against sectors that exhibit this short-term "boom and bust" characteristic, as the Green Screen will identify them at exactly the worst times to invest.

There are not many stocks from the industry left, but we will eliminate two more based on the same reasonings. Tidewater (TDW) is an oil services company focused on offshore drilling operations, which is an unappealing segment of the market (the linked article explains why). Less distasteful is Golar LNG (GLNG), which is more of a midstream firm which operates marine-based liquified natural gas (LNG) carriers and converters. The midstream part of oil & gas is slightly more interesting than services, but I don't see anything remarkable from a growth or competitive advantage standpoint which would make me want to add it to the Watch List. Both firms get the "reject" treatment and will be crossed out in the Green Screen lists.