Discusses the transaction details, highlights Q3 results with some commentary from the street
Software giant Adobe Inc (NASDAQ:ADBE) was the talking point of U.S. equity markets on Thursday after announcing a huge $20 billion dollar acquisition of web-based collaboration design platform known as Figma. The transaction was announced simultaneously with the group’s third quarter results.
Q2 2022 hedge fund letters, conferences and more
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Adobe's Stock Falls
News of the transaction’s price tag and third quarter results sent ADBE -13% lower at the open before losing further ground and closing with a loss of -16.8% for the day. After hours the stock has retraced a further -1.6% lower.
In the press release, Adobe stated that it would be paying for the $20 billion dollar transaction half with cash and half with ADBE stock.
Additionally, about 6 million restricted stock units (RSU’s) will be granted to Figma’s CEO and employees that will vest over four years.
Adobe expects to fund the acquisition from existing cash on the balance sheet and will use debt if necessary.
The transaction details highlighted that Figma will have an estimated total addressable market of $16.5 billion by 2025 and that the company expects to surpass $400 million in total annual recurring revenue (ARR).
The Figma business supposably demanded a significant valuation due to healthy gross margins of 90%, positive operating cash flows and high-growth.
The transaction is expected to close in 2023, subject to regulatory clearance and approval by Figma’s stockholders.
Figma’s CEO and Co-Founder Dylan Field is expected to stay with the company and lead the group.
Adobe's third quarter results seemed like a beat at the first glance with adjusted earnings per share (EPS) of $3.40 compared to consensus forecasts of around $3.55 per share. The group generated sales of $4.43 billion which was spot on with analyst forecasts of $4.44 billion.
Total Digital Media annual recurring revenue grew 3.5% from the second quarter, ending at $13.40 billion. The figure was in line with the streets’ forecast.
Adobe provided guidance for the fourth quarter, where it expects earnings per share to stay flat at $3.50 while revenue is expected to grow 2% over the next quarter to $4.52 billion. The revenue guidance came in below the streets’ forecast of around $4.6 billion.
In total, at a glance the result came in broadly as expected with fourth quarter revenue guidance being the only disappointment.
The chart provided to the right from the Fintel financial metrics & ratios page illustrates the company’s rolling revenue and profitability over time with the share price.
Following the result and news of the acquisition, analyst Keith Weiss from Morgan Stanley reduced his ADBE price target to $337 from $362 prior but remained ‘equal-weight’ rated.
Weiss believes Figma will be a new asset for the group that will support longer-term growth in the Digital Media segment. However, he noted that investors will have increased concerns regarding the organic growth trajectory and durability of high industry margins, which will likely weigh on the shares in the near term.
Rob Oliver from Baird Equity Research downgraded the stock to ‘neutral’ from ‘outperform’. Oliver believes the transaction’s dilutive impact on margins over the next few years, the price paid and overall macro pressures will continue to weigh on the stock.
Fintel’s institutional ownership accumulation score of 27.69 is bearish on ADBE. This is due to the institutional level of interest in the stock currently being below peers. Adobe ranks in the bottom 20% when ranked against 26,545 peer companies.
Adobe, despite the lower levels of recent interest, continues to have 3,740 institutions on the register that collectively own 434.6 million shares in the company.
Article by Ben Ward, Fintel
