Over the last four years Adobe’s revenues have grown at 25% p.a. to over $3 billion in the year ending 30 November 2007. This growth has been driven by the Creative Solutions segment consisting of Adobe’s Creative Suite and Photoshop offerings. Creative Solutions grew 37 % and represented 60% ($1.07 billion) of Adobe’s revenues in the six months to 30 May 2008.

Trading at $45.15, the upper end of their 12 month range ($30.70 - $48.47) and up 46.6% since March 17 we decided to apply the Valuecruncher interactive valuation tool to Adobe.

Adobe Chart

Discounted Cash Flow (DCF) Assumptions and Valuation

Based on historic growth rates and analysts estimates we have forecast Adobe’s revenues to grow to $4.6 billion in 2010 representing an annualised growth rate of 13.4% over the next three years. We have projected slight expansion in EBITDA margins from 40% in 2008 to 42% in 2010. We have used a terminal growth rate of 5% and a WACC (discount rate) of 11.25% (based on Aswath Damodaran’s estimate for the computer software/services sector).

Valuecruncher valuation model of Adobe and interactive assumptions.

Our analysis incorporates the cash and debt on the Adobe balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of $39.41 which is 12.7% below the current share price of $45.15.

Comparable Company Analysis

Based on our DCF analysis Adobe appears slightly over valued. To provide additional context to our analysis and the current price we have collated the trading multiples of Adobe’s competitors and other software companies. We have included companies such as Apple and Google because they are considered key competitors by Adobe despite software sales not representing their core business.

Adobe is currently trading at a P/E ratio considerably higher than the industry average and appears fully priced based on the comparable company analysis.

Key Considerations

• Can Adobe continue to grow their core offerings in the face of increasing competition and the threat of free or open source alternatives?
• Will Adobe develop new material revenue streams beyond their core Creative Solutions and Knowledge Worker Solutions segments? e.g. Mobile and Device Solutions represented $37.4 million or 2% of Adobe’s revenues in the six months to 30 May 2008.

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