The Backdoor AI Play

[View in browser]( [The Spill Logo] Proprietary Data Insights Financial Pros’ Top Software Infrastructure Stock Searches in the Last Month Rank Ticker Name Searches #1 [MSFT]( Microsoft Corp 310 #2 [ADBE]( Adobe Systems Inc 110 #3 [FTNT]( Fortinet Inc 35 #4 [SNPS]( Synopsys Inc 30 #5 [OKTA]( Okta Inc Cl A 28 #ad [[FREE REPORT] What Investors Are Searching]( Brought to you by [The Alt]( [Are Alternative Investments a gray area? The Alt can add some color.]( [The Alt - Are Alternative Investments a gray area? The Alt can add some color.]( The most profitable investors stay informed and up to date. Stay on top of Alternative Investment trends with credible articles and videos directly to your inbox with our hand-curated newsletter The Alt. [Subscribe now](. The Backdoor AI Play Love ‘em or hate ‘em, you can thank Adobe Systems (ADBE) for every PDF you use. But did you know the company’s a global leader in artificial intelligence? The company’s generative AI is one of the best, capable of editing photos through text and ‘zooming out,’ yielding interesting results. Financial pros have been eying the stock for an entry point. And Monday may have given them an opportunity. So, what happened, and should you follow? Adobe’s Business Yesterday, Adobe announced plans to terminate a $20 billion agreement to acquire Figma, a web-based design tool developer, costing Adobe $1 billion. Financial pros kept a close eye on European regulators who were unlikely to greenlight the deal given the close proximity of the businesses. Adobe is a digital media marketing powerhouse. They bring artwork, graphic design, and creativity to those professionals and those of us who still think magic eye posters are cool. The company's operations are vast, offering a range of creative, marketing, and document management services. Adobe's flagship products include software like Photoshop and Acrobat Reader. Additionally, their Creative Cloud platform provides access to the latest versions of all Adobe professional creative desktop applications. Adobe segments its business into the following areas: Digital Media (73% of total revenues) - This segment includes creative cloud services like Photoshop, Illustrator, and Premiere Pro, and document cloud services such as Acrobat. Digital Experience (25% of total revenues) - This division focuses on providing marketing and analytics solutions to businesses, helping them manage their customer experiences. Publishing and Advertising (2% of total revenues) - This involves legacy products and services that are not part of the company's strategic focus but continue to generate revenue. [Segment classifications] [Source: Adobe Investor Relations]( Adobe reported Q4 earnings last Wednesday, with some notable highlights: - Revenues up 12% YoY for the quarter - Digitial Media set a new record for average recurring revenue of $464 million - Net income increased 26% to $1.48 billion, or $3.23 per share, YoY for the quarter Financials [Financials] Source: Stock Analysis Adobe has put up remarkable revenue growth, exceeding 20% from 2016-2019 and 10% from 2020-2023. At the same time, it expanded gross margins a touch while improving on operating margins. We calculated the free cash flow margin by hand and note that it remained consistent around 35%-37% over the last few years. With negligible debt, that’s freed management to repurchase $7.1 billion of stock in 2022 and another $5.6 billion in 2023, or a roughly 2%-3% annual yield. Valuation [Valuation] Source: Seeking Alpha Adobe’s P/E valuation might seem high. But when you compare it to other high-growth tech names. It’s pretty much in line. Even its 33.2x price-to-cash-flow multiple is slightly higher than Microsoft’s (MSFT) 29.0x and is the same as Okta’s (OKTA). Growth [Growth] Source: Seeking Alpha We love Adobe’s consistent growth across all categories, from revenues to earnings. While it’s not as high as Fortinet’s (FTNT), it’s on par with Microsoft and Synopsys (SNPS). We expect Adobe’s lower forward revenue growth to be temporary in an otherwise long-chain of excellence. Profitability [Profit] Source: Seeking Alpha Adobe stands out for its profitability, second only to Microsoft. The return on capital, equity, and assets implies excellent capital management and fiscal discipline. Plus, they boast some of the group's best EBIT and free cash flow margins. Our Opinion 8/10 Although Adobe is expensive, the company consistently delivers exceptional returns for investors. Their suit of products is excellent, catering to customers of all sizes with a custom feel. They’re truly one of the greats in digital design and are unlikely to be surpassed anytime soon. 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