Morningstar Equity Analyst Report | Report as of 05 Jan 2021 04:29, UTC | Page 1 of 7 Adobe Inc ADBE (XNAS) Morningstar Rating Last Price Fair Value Estimate Price/Fair Value Trailing Dividend Yield % Forward Dividend Yield % Market Cap (Bil) Industry Capital Allocation QQQ 485.34 USD 500.00 USD 0.97 — 0.00 232.83 Software - Infrastructure Exemplary 04 Jan 2021 04 Jan 2021 11 Dec 2020 04 Jan 2021 04 Jan 2021 04 Jan 2021 22:19, UTC 03:19, UTC Morningstar Pillars Analyst Quantitative Important Disclosure: Economic Moat Wide Wide The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of Conduct Policy, Personal Security Trading Policy (or an equivalent of), Valuation QQQ Overvalued and Investment Research Policy. For information regarding conflicts of interest, please visit http://global.morningstar.com/equitydisclosures Uncertainty Medium High Financial Health — Moderate Adobe Delivers Solid Results While Keeping the Big Picture in Focus; FVE Source: Morningstar Equity Research Up to $500 Quantitative Valuation ADBE Business Strategy and Outlook offerings. a USA Dan Romanoff, CPA, Eq. Analyst, 10 December 2020 Undervalued Fairly Valued Overvalued Adobe has come to dominate in content creation software Analyst Note with its iconic Photoshop and Illustrator solutions, both Dan Romanoff, CPA, Eq. Analyst, 10 December 2020 Current 5-Yr Avg Sector Country Price/Quant Fair Value 1.22 1.11 0.77 0.83 now part of the broader Creative Cloud. The company has Wide-moat Adobe reported strong fourth-quarter results, Price/Earnings 44.8 55.2 21.4 20.1 added new products and features to the suite through including upside to consensus for both revenue and Forward P/E 43.3 — 15.9 13.9 organic development and bolt-on acquisitions to drive the non-GAAP EPS, and provided quarterly guidance that was Price/Cash Flow 41.1 33.2 15.6 13.1 most comprehensive portfolio of tools used in print, ahead of Street expectations, but included an extra week Price/Free Cash Flow 44.3 36.1 23.0 19.5 Trailing Dividend Yield% — — 1.89 2.35 digital, and video content creation. Adobe’s creative along with the Workfront acquisition. Normalizing for Source: Morningstar strategy has evolved from point solutions, to the bundled these items, we believe the full-year revenue outlook is Creative Suite, to the Creative Cloud, which is now offered in line, while EPS is slightly better than expectations. In Bulls Say exclusively via a subscription model. The benefits from conjunction with its earnings release, Adobe also provided OAdobe is the de facto standard in content creation software as a service are well known in that it offers its annual investor day presentation, which contained software and PDF file editing, categories the significantly improved revenue visibility and the some incremental data points but no big surprises. The company created and still dominates. elimination of piracy for the company, and a much lower company did authorize a new $15 billion share buyback OShift to subscriptions eliminates piracy and makes cost hurdle to overcome ($1,000 or more up-front, versus plan. New customer engagement levels remained robust revenue recurring, while removing the high up-front plans as low as $10 per month) and a solution that is and activity on adobe.com remains elevated as a result of price for customers. Growth has accelerated and regularly updated with new features for users. the extended remote work environment. We think results margins are expanding from the initial conversion and the investor day combine to support our investment inflection. CEO Shantanu Narayen provided Adobe with another case that Adobe will continue to dominate the creative OAdobe is extending its empire in the creative world growth leg in 2009 with the acquisition of Omniture, a segment, and its well-rounded portfolio, including from content creation to marketing services more leading web analytics solution that serves as the Magento and Marketo, position the firm as a digital broadly through the expansion of its digital foundation of the digital experience segment that Adobe marketing leader. Given results and guidance, in experience segment. This segment should drive has used as a platform to layer in a variety of other conjunction with advancing our DCF a year, we have growth in the coming years. marketing and advertising solutions. Adobe benefits from included higher growth throughout our forecast and are the natural cross-selling opportunity from Creative Cloud therefore raising our fair value estimate to $500 per share, Bears Say to the business and operational aspects of marketing and from $400. As such, we see shares trading at a modest advertising. On the heels of the Magento and Marketo discount to our fair value. OMomentum is slowing in Creative Cloud after acquisitions in the second half of fiscal 2018, we expect elevated growth driven largely by the model Adobe to continue to focus its M&A efforts on the digital Fourth-quarter revenue grew 14% year over year to $3.424 transition to SaaS. experience segment. billion, compared with CapIQ consensus of $3.365 billion. OThere is greater uncertainty in digital experience Digital Media was $45 million ahead of our model and given this is an emerging space and one that Adobe The Document Cloud is driven by one of Adobe’s first drove most of the upside. Advertising was moved from neither created nor dominates. Growth could be products, Acrobat, and the ubiquitous PDF file format Digital Experience to Publishing, so direct compares are slower than we anticipate or margin expansion may created by the company, and is now a $1.5 billion business. challenging, but we calculate that both of these segments not materialize. The rise of smartphones and tablets, coupled with also ahead of our model. Net new digital ARR was $548 O Digital experience has been built largely through bring-your-own-device and a mobile workforce have made million, versus guidance of $540 million, a slowdown from acquisition, including Magento and Marketo in 2018. a file format that is usable on any screen more relevant much stronger upside recently but still solid. Document This raises the possibility of disruption from than ever. Adobe believes it is attacking an addressable Cloud (within Digital Media) was strong in the quarter and inadequate integration efforts and lends credence to market greater than $147 billion. The company is we note that Adobe Sign was more directly discussed this concerns that Adobe may overpay for increasingly introducing and leveraging features across its various year beyond smaller mentions in the past. Not surprisingly, large deals. cloud offerings (like Sensei artificial intelligence) to drive Magento was also strong. a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media © Morningstar 2021. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. 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To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. Morningstar Equity Analyst Report |Page 2 of 7 Research Methodology for Valuing Companies Qualitative Equity Research Overview When considering a company's moat, we also assess to decline (or rise) to its cost of capital. During the Stage At the heart of our valuation system is a detailed projection whether there is a substantial threat of value destruction, II period, we use a formula to approximate cash flows in of a company's future cash flows, resulting from our stemming from risks related to ESG, industry disruption, lieu of explicitly modeling the income statement, analysts' research. Analysts create custom industry and financial health, or other idiosyncratic issues. In this balance sheet, and cash flow statement as we do in company assumptions to feed income statement, balance context, a risk is considered potentially value destructive if Stage I. The length of the second stage depends on the sheet, and capital investment assumptions into our globally its occurrence would eliminate a firm’s economic profit on a strength of the company's economic moat. We forecast standardized, proprietary discounted cash flow, or DCF, cumulative or midcycle basis. If we deem the probability of this period to last anywhere from one year (for modeling templates. We use scenario analysis, in-depth occurrence sufficiently high, we would not characterize the companies with no economic moat) to 10–15 years or competitive advantage analysis, and a variety of other company as possessing an economic moat. more (for wide-moat companies). During this period, analytical tools to augment this process. We believe this cash flows are forecast using four assumptions: an bottom-up, long-term, fundamentally based approach To assess the sustainability of excess profits, analysts average growth rate for EBI over the period, a allows our analysts to focus on long-term business drivers, perform ongoing assessments of the moat trend.