Transcription
Well, Adobe, it was literally a copy and paste of the last four earnings. And this one in particular had me doing this famous meme. I don't know if you've seen this one, but it's a book, The Intelligent Investor. Don't know if you've read it, but it's a fantastic book about investing and value investing and that if you buy great companies at great prices and they deliver fantastic financials, you will get rewarded. And I looked at that Adobe earnings last night and I went, "Okay, we're going to get rewarded for this." This is another fantastic earnings report. I have owned this company now for four earnings quarters and all four have been great.
And I looked and read those earnings last night. And as I was reading those earnings, I looked at the EPS being up 18% year-over-year. I looked at the revenue growth of 13% year-over-year. I look at them once again for the fourth time in a row hiking up the guidance and going, "Hey guys, just letting you know we're hiking up the guidance. Our AI progress has been very well. It've been going really well. That gives us the confidence to hike up this guidance." And what do we see? We see Adobe stock once again crashing off earnings and down 5%.
I actually put on the Discord group yesterday. Um, one of the members bear said, "Do I have any thoughts on the Adobe earnings tonight?" And I said, "No idea. You know, with earnings, it's 50/50. Um, you can have good earnings and the stock will go down. You can have bad earnings and the stock will go up. It's gambling. It's like red or black at the casino." But hey, this is my thoughts here. Every time we have good earnings from Adobe, they seem to beat the numbers all the time. They find one negative, some negative somewhere and go, "Oh, let's just drop it down because of that reason and it always drops about 5%." And look at what we had. We had the stock down around about 4% uh sorry 5%. And I was saying, look, I would take 10% revenue growth, 12% EPS growth. I'm happy. And what do they come out and do? They do 18% EPS growth. 18, guys. One, 18% EPS growth and 13% revenue growth. Like complete reaceleration. And the stock once again goes down. And you just sit there after four earnings reports now of consistent beats and market outlook hikes and it just drops again. It drops again. And Adobe is now to the is going to go to the share price that it was at back in around about 200 and well we got to keep going. We got to keep going. uh 2018 uh eight years eight years of financial progress and even right now financial progress and it's now back at 2018 levels and I'm sat there I am this this was me last night intelligent investor value investing if companies keep growing profit and revenue reward shareholders you will get rewards and once again we go down I'm just throwing that book in the bin by the way this isn't my photo it's a very famous meme if you never seen this before. I don't want anyone thinking those are my shoes, by the way. That's the one thing that made me nervous about posting this photo is that people might think that's me and they think that's my shoe choice. It's not. But yeah, I was recreating this meme last night looking at those Adobe earnings. So yeah, we'll get on to it.
So yeah, overall great earnings from Adobe. Again, I would give them a solid 10 out of 10. Um, really, really good. I mean I was happy with like 12 13% EPS growth 18 18 EPS growth 18% revenue growth of 13% as well. Uh they also as we spoke about a second ago um they also hiked up the outlook as well um which was um a very nice hike up. You can see here that the non-gap EPS was expected to be 24.35 to 2445. Um, and that was from the previous guidance of 2356. So, a a good what 5% hike up there on the EPS guide, which is great to see. Um, and also a hike up on the revenue side as well. Uh, and by the way, if you're on the private group, I did just drop a video on Reddit, so do go check that out. It's very interesting stock. um it's been one that's been in demand on the stock request and I finally had a look and it was certainly a lot better than what I thought it was going to be. So if you do want to see that guys join the private group.
Um, but getting on to these Adobe earnings overall. So they said that Adobe delivered record revenue of 6.62 billion in Q2 reflecting strong AI demand. So they once again said look this AI demand is very good for us. It's also one of the reasons why we're going to go on and hike the outlook again the fourth time. And this is a company that is currently getting value like it's going to be disrupted by AI. And yet we've sat here for 12 months and there's not a flinch of it showing up in the financials. And Adobe for the last four quarters have come to us and gone, hey, we're even going to hike up our guidance because we're actually benefiting from AI. Not just keeping market share, benefiting from AI, which is incredible when you look at that point of view. Uh one thing that is worth noting is they did have a 0.17 per share non-cash goodwill impairment charge on their account. So have a look at that when you look at EPS. So worth maybe looking at nongap EPS numbers at the moment for this quarter. Uh although Adobe repurchased approximately 8.5 million shares in this quarter. 8.5 million. I mean they've got like a was it 25 billion share repurchase program at the moment which is over quarter of the company. Uh but just to show that coming into effect right now, which is great to see it happen when the the stock is so cheap and it's going to be even bigger next quarter if this stock keeps falling. And 8.5 million is around about 2% of the company. Like in a 90-day period, Adobe bought back 2% of the whole company in 90 days. 90 days. I own 2% more of Adobe in 90 days. That's incredible. I imagine that over a year, 8%. I'm going to own 8% more of Adobe in in a year's time at this rate if they keep going buying the shares back and probably even more now the stock price has fallen. I just don't know how this stock that is already down 9% this month brings out these earnings and then it drops even more. I just mind-blowing.
Um, now as I say in this post when I originally put to uh the reply to bear is that the market seems to focus on one negative here and last quarter's negative is what the CEO was leaving and I looked at that and went okay fair enough. like the CEO is the guy that's been there for many years and he's transformed Adobe into this giant and I can see why the market goes oh so now you walk away in a big uh time of the this AI in innovation and now you're walking away and you can look at that and go ah that's not great but then as we say you know you look at his age and uh you look you probably be thinking actually you know what I've got the company into a good stage ready for its next life um and now I'm going to walk walk away and this this quarter's negative that the market is trying to pick on is that the the CFO Dan Durn is going to leave the company and you know the easy observation of that is to go oh now the CEO is going and the CFO is going panic stations panic stations we need to be you know we need to be uh worrying about that both of them leaving now this is where you do a little bit of research and if you do a little bit of research into what's going on with the CFO so he's actually going to leave to go to the semiconductor Marvel which has been um absolutely on fire at the moment and all the semiconductors have been on fire and if you have a look at his background he's only been in do Adobe for four years like this isn't someone that's been through the company through thick and thin like he's been there for a decent amount of time but you know it's not make or break and it's the CFO guys you not a critical part here and if you look at his background he generally moves around every kind of four years in that CFO role. And if you look at his background, he's very much in the semiconductor space. So if he's got the opportunity to go to a company that is four or five times the size of Adobe, you've got Jensen over at Nvidia saying that the company he's going to is going to be a 1 billion, sorry, one trillion market cap in the next few years, which would be what 10 times the size of Adobe. He's going to what he his background is and the opportunities being a company 10 times larger than Adobe. Of course he's gonna go like me guys. Like are we being that stupid here? Sorry for the strong language. But I just can't believe the market reaction to this. It's it's crazy. It's absolutely crazy.
Um, listening to the conference call uh the CEO of Adobe said that AI is accelerating customer behavior at an un unprecedented speed. He also mentioned about that they are going to make sure that the creative cloud second halfline optimization is going to prioritize the premium funnel. Uh, and the reason why is that is to get more users onto that platform and then maximize them for the next few years and to put the pay walls up, which I always kind of think like this is a big thing at the moment. There's so many companies trying to maximize this premium model and how long until this this is pulled where they go actually we need to make money from it. I mean, we're seeing it with everything at the moment. Like um a lot of these AI um search engines and large learning models that have been being built like a lot of them are being premium, but how long until they venture go, you know, we got to make some money from these guys. Uh I think that's going to be an interesting point when we do get there. But obviously, I think that's the right thing to do. There's no point putting big pay walls up at the moment, otherwise you're just certainly going to lose market share and then you don't attract those customers for many years. And when I look at the guidance at the moment, the guidance clearly shows that this push is not going to affect the financials that much. So go for it. Uh, you know, you got to be competitive in this space right now. And Adobe certainly can do it with the growth they have and the profit margins that they have at the moment. And clearly what is the big story here that this is going to be absolutely killed by AI and stamped on five times and then kicked in the head a couple of times. You know, when you look at AI at the moment for Adobe, when they look at the um AI invention at the moment, 3x year-over-year increase in AI first average recurring revenue now greater than 500 million. This is supposed to be killing the business. And it 3xed and it's now got an AR greater than 500 million. Next slide, please.
So, looking at Adobe right now, it's going to be about uh 9 uh 9.3 times earnings. After the drop, it's going to probably be pushing towards eight times earnings. High eight times earnings. 2027P, it's going to be down into the sevens for Adobe. Absolutely incredible. Absolutely incredible. Like that to me would v would show that this company is being valued like it's a company that is dead and it's not even going to maintain slight profit growth and revenue growth. Never mind it's showing acceleration at the moment. It should be rewarded actually going, you know, this could benefit from AI at the moment. Looking at those numbers, it's not even halfway there. It's in the dumps. It's dead. the market says this is dead at the moment which is uh incredible right now and then also you factor in that share buyback 2% a quarter of the buying back at the moment it's it's nuts and uh you know Adobe's normally traded around about 48 times earnings which has always been a bit of a heavy premium I agree I always thought when Adobe was 48 times earnings I was like that's a bit of a rich valuation guys and it was always going to come back at some point but I always think like somewhere between like 25 to 30 times earnings for Doby's fair. You know, they're aggressively rewarding shareholders with buybacks. It's growing at very good rates of 13% a year. The EPS is growing even faster at 18%. That's that's, you know, I think it's at least a 20 times earnings business. I think you that's when you argue that is it 25 to 30 times earnings and trades at a premium for these levels of growth that it's doing. And that's where I think it would should be. And even when you look at the S&P right now, I mean the S&P is trading at 25 times earnings and that's year bang average companies and Adobe is not a bang average company. You know, a company growing at 18% EPS a year. It's not bang average. And I guess really like what is the way that this momentum shifts on Adobe? Like at what point does the market go, huh, you know what, we've priced this like a dead company for the last year and actually it's doing okay. was doing better than okay. But even if it just values it as an okay company, which I don't think it's doing right now, I don't know uh is the answer. I don't know what flips the market to get back into it ultimately. Is it when the AI kind of bubble burst? I don't know.
Um, no idea because they have now done four quarters that I've owned the stock of great financials and it hasn't been rewarded. And I guess this is the point where I've just got to stay patient and think that at some point the market's going to reward Adobe with the financials it's doing. Um, and that's all I can say. It's one of those times where it is significantly annoying time to be an Adobe shareholder. I can't believe I've sat in a company that has done four quarters of EPS revenue and and uh outlook hikes fallen down to, you know, significantly below historic levels and yet still doesn't show any signs of giving rewards on the share price. But listen, we got to stay we got to stay patient and as we've seen before, the market can snap its fingers and then fall back in love with a stock. You know, Google was a stock it hated. Snap the fingers, it loves it again. Meta was a stock it hated in 2022. Snap of the fingers and uh it fell in love with it again. And you blink and you blink and in in a month's time, two months time, the stock's up 100%. Not saying Adobe is going to go 100 up 100% in a month, but certainly that I feel like eventually, you know, people will wake up and go actually maybe it's gone a bit too low. And then eventually when the stock goes up 10%, you know, people go, "Oh, okay. I need to get into Adobe now." And then it's up 20%. And then everyone goes, "Okay, Adobe's waking up, guys." and then they get into it and everyone starts chasing the stock eventually. I I just don't really know.
And and to show you from a number point of view as well about where Adobe is at. Um, yeah, you got revenue growth of 8 n 10% growth is what I've put in here, which is below the 13% they're doing at the moment. Um, I've factored in top number of 84 billion market cap where I think it's going to open up probably today. Um, and I've also factored in a 10 billion share buyback, not forgetting they've actually got a 25 billion share buyback on. So I could have increased that. So I think the revenue numbers are pretty conservative. I think the um market cap is pretty conservative given the share buyback. 29 30 31% profit margins which uh they do about 30% profit margin right now. And uh I've done 20 times earnings. So market average valuation which I think it should be premium. So we'll do that in a second. And even on the low side I've don't think I've seen this before. You've got 141 to 173% upside with the share buybacking. If they do the higher growth and get a little bit of profit margin expansion, you got 177 to 214% upside here, which is yeah, for a very big mega cap like this is is very surprising. And like that's 20 times earnings, guys. If I if I put this stock at 30 times earnings, let's just update this to 30 times earnings so you can have a look here. So 30 times earnings, then your low side's 262%. I don't think I've ever seen that on the low side before to to 371% on the high side. Wow. I mean, let's say let's do 20 times earnings on Adobe. I want to see how low you could afford to go to get 100% upside. Like how how much could the numbers collapse by? So let's collapse the profit margin by another 2%. Okay, you've still got over 100% upside. Let's collapse the collapse the profit margin by 4%. You've still got 100% upside. Wow. Let's slow the revenue growth down to 6% growth a year. Even with the share buyback on, you've still got over 127%. Wow. Okay, let's put the profit margin down to 5%. You still got 100%. Um, let's put the revenue growth down to 4%. There we go. That's about it. So, Adobe could go to 4% revenue growth. The profit margins could collapse by 5%. And you could still be looking at 100% return there. Granted, it trades at 20 times earnings. I think that kind of shows you how low it's been. It's gone now, hasn't it?
Listen guys, I don't know what to say to you. Um, you know, in investing, I've always been told and listening to the greatest investors of all time, Peter Lynch, Warren Buffett, you buy a company that grows profit and revenue at a great valuation, is kind to shareholders through share buybacks. you buy that those very discounted metrics, they normally come on to be good performers. And look, listen, it's four annoying quarters of seeing this happen. And it could be six, it could be seven, it could be 10 of quarters, but at some point I feel like it will get rewarded. And it's just about staying patient, I guess, overall.
So that's it. Um, that's the video for today, guys. I hope you enjoyed it. Um, I'm not going to do a video on YouTube this weekend or on the Patreon. I did just drop a video on Patreon if you do want some content over the weekend. Um, but yeah, I'm not going to do a video for the rest of the weekend. I'm going to have the weekend off. Um, so apart from that, have a great weekend and um I'll see you on on Monday.