SIMON BROWN: I’m chatting now with Gary Booysen, portfolio manager at Rand Swiss. Gary, I appreciate the early morning time. Adobe – I’ve used their services for a long time. I used to buy their extremely overpriced software. More recently, of course, they’ve moved to software as a service. I’ve been using that.
Their results last week I thought weren’t bad, but they came out with an announcement. They’re going to be buying Figma for some $20 billion-odd. Their market cap, what, about $140 billion. So it’s about 15% of market cap. The market hated that news. Is this an opportunity? Is this a stock that you think has got merit?
GARY BOOYSEN: I think it does, to an extent. To say Adobe is a fairly robust business is a massive understatement. If you look at what Adobe has done, essentially since the Adobe systems created the PDF in 1993, it’s nothing short of spectacular. If you look at their earnings profile, look at their revenue profile, they’ve managed to grow consistently. It’s a very profitable, very cash-generative business.
But looking at that deal, I think everyone is criticising it, saying to pay $20 billion for a company that was only a year ago valued at $10 billion, in 2022 is a little bit excessive. A lot of people are criticising it and saying you’re paying 2021 prices in 2022, and this is not a world where you have to pay up for tech.
But I think there were a number of good reasons for the deal and Adobe is a very strong business that, because of its scale and because of its size, needs to do deals like this to continue to advance its top line and its bottom line.
SIMON BROWN: I like the point you made there – pay up for tech. Just a year ago markets were peaking. The Nasdaq and the S&P had a brilliant 2021, and suddenly we are in a whole fundamentally different place. You seem to be suggesting that this isn’t perhaps a blip, that perhaps tech is going to have a period of, I don’t know, lower growth, lower valuations.
GARY BOOYSEN: Well, I don’t know if you’re going to have lower growth. If you look at the underlying growth of Figma specifically, its growth even over the last year has been absolutely spectacular. And the idea that these companies aren’t going to grow just because they are tech, I don’t think is correct.
If you’re looking at kind of fundamental metrics, revenue is going to increase, earnings are going to increase. We cannot be sure of that, but I think that’ll be a pretty safe deal.
Most of the big unwind that you’ve seen in Adobe over the last bit has just been price falls based on, I suppose, people being unwilling to pay up for future growth because of higher interest rates, because of macroeconomic factors. And, if you take Adobe all the way out, say 20 years, you can see that the price/earnings ratio has come down dramatically in the last year or so. The stock is down 50% and the earnings are largely unaffected. Sure, this deal’s only going to be earnings-accretive in three years’ time, but their fundamental software as a service business is strong.
They have their annualised recurring revenue. These are subscriptions that aren’t going to be cancelled. Maybe you’ll get a couple cancelled, but largely these are very entrenched systems in people’s businesses. And those earnings and that revenue are fairly secure.
So what you have is Adobe currently trading on a historic PE of around 20; that puts you back at about the price you were paying in earnings terms [in] about 2013. At the bottom of the 2008/9 global financial crisis you could have got Adobe on certain days at around a 10 or a 11 PE – but that was for a very, very brief period of time with a lot of market panic.
I’m definitely not saying that if we go into a very panicky, very fearful market you could easily lose another 50% on Adobe. Is Adobe the kind of business that’s going to go under? Absolutely not. I cannot see that happen. And buying it at essentially half the half the price that you were getting it a year ago, I think there’s merit to that.
Obviously guys don’t like the Figma deal. It’s a big deal for them. Their previous largest deal was in 2018 for Marketo Inc, which was around $4.5 billion. This is $20, so it is significantly larger. But at the same time they’ve taken a competitor out of the market. They are a tech company and, yes, the market doesn’t like tech companies at the moment, but tech companies – and Adobe by its nature – have to go and buy out these competitors. And if they can’t develop that innovative edge inside the company, they buy it. That’s how tech companies work, especially when you’re dealing with one of the largest software companies in the world. They buy their IP [internet protocol], they buy the most successful companies into their stable. That company then leverages the networks that Adobe has to scale their business much more rapidly.
And sure, looking at Figma, it has at least a $400 million ARR [annual recurring revenue] at the moment, which tumbled from last year. But where is that going to be in three or four or five years when it can sit within Adobe’s network? I think a lot higher. So then suddenly paying 50 times its revenue looks like 25 times its revenue next year, and maybe only 10 times its revenue in the year after.
So, all together, maybe the market is overreacting, maybe not. It does look very expensive as a deal, but [at] sub-$300/share on Adobe I think it’s probably worth having a nibble.
SIMON BROWN: Certainly it does. I’ll take your point. We are getting an opportunity here on the Figma deal. Yes, the market might not like it, but it’ll move past that. Maybe it is a little overpaying, [but] You’re getting Adobe really cheap.
Gary Booysen, portfolio manager at Rand Swiss, I appreciate the early morning.
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