Image Source: Pixabay

As part of an ongoing series, each week we typically conduct an analysis on one of the companies in our screens. This week, however, we will take a look at one of the stocks that is not currently in our screens: Adobe Inc.

Profile

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing, and engaging with compelling content multiple operating systems, devices, and media.

The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).

Recent Performance

Over the past 12 months, the share price has moved up by approximately 8.18%.

Source: Google Finance

Inputs

• Discount rate: 9%
• Terminal growth rate: 4%
• WACC: 9%

Forecasted Free Cash Flows (FCFs)

Terminal Value

• Terminal Value = FCF * (1 + g) / (r – g) = 324.06 billion

Present Value of Terminal Value

• PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 210.62 billion

Present Value of Free Cash Flows

• Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 45.50 billion

Enterprise Value

• Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 256.12 billion

Net Debt

• Net Debt = Total Debt – Total Cash = -1.98 billion

Equity Value

• Equity Value = Enterprise Value – Net Debt = 258.10 billion

Per-Share DCF Value

• Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $582.61

Conclusion

Based on the DCF valuation, the stock appears to be overvalued. The DCF value of the $582.61 share is lower than the recent market price of $586.55. The margin of safety is -0.68%.

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