Updates for Adobe, Microsoft, and Atlassian

Continuing reviews of quarterly reports rolling in, lets take a look at 3 software giants in the portfolio: Adobe, Microsoft, and Atlassian.

Adobe (ADBE)

Adobe reported a few weeks ago, and its 4th quarter and fiscal year results looked strong. Revenue grew 13% year-over-year in constant currency (+10% for the year). The Digital Media segment (by far the largest, with Creative Suite and Document Cloud) was the fastest grower at 14%, while the Digital Experience unit grew 11%. The Figma acquisition is still "on track" according to management - we will see how this develops as there is a lot of pushback on this one, particularly in Europe. Free cash margin of 36% for the year is a bit below the 40%+ figures we've seen in prior years, but cash flow numbers can be heavily influenced by timing... we will keep an eye here because the fair value model assumes a long-term figure of 40.5%.

Adobe's fair value target gets a decent bump to $604 (from $569). The firm continues to target 10%+ top line growth for 2024.

Microsoft (MSFT)

Microsoft still sits in the Watch List. It is a terrific company, but we haven't quite seen an attractive enough price to buy at, yet. Q1 results were excellent. Revenue was an impressive +18%, while operating income was up 33% and free cash flow for the quarter soared over 71%. A few percentage points of the revenue strength was due to closing the Activision deal in the quarter, which juiced the Xbox division's revenues by 55% over last year.

Cloud services continues to be the growth engine for Microsoft, with the cloud and Dynamics unit up 21% and now comprising the company's largest business unit. I was also impressed with the growth in commercial subscriptions to Office 365, which were up 17%. Microsoft, as huge as it is (the largest U.S. company by market cap at present), still has a number of impressively growing product and service lines.

My position on Microsoft hasn't changed at all - awesome company, still not *quite* cheap enough stock to buy. That said, I am bumping the fair value from $417 to $449. For those with lower margin-of-safety standards, the shares trade under that price at present.

Atlassian (TEAM)

Wrapping up our "software giants" update, we have Atlassian. Like the other two companies, Atlassian is a very predictable, moaty, subscription-based business that rarely surprises one way or another. That was the case again in its Q2 report. Revenue was up 21% on the back of 31% growth in subscriptions (and a subsequent 30% decline in the deprecated license-and-maintenance business). It was the company's first-ever $1 billion dollar revenue quarter. Free cash flow nearly doubled over the year-ago quarter. In general, we see Atlassian executing its full cloud transition effectively.

The firm launched Atlassian Intelligence in the quarter, which adds AI features to its JIRA and Confluence tools. Anyone who has ever used these platforms knows how difficult it can be to organize and find things given the amount of data that gets put into them. Everyone wants to tout their AI efforts - Atlassian is a company whose products can greatly benefit from it.

Atlassian performed pretty much right in line with our model, so the fair value price remains $181. The stock has done very well over the past year and trades a bit above that at present. It remains a "hold".