Hey guys, it's sasha adobe has recently risen into the top 20 largest companies in the united states. The share price has gone up 48 since the low point in the 8th of march. That's a huge, a phenomenal rise in just 5 months, and there are some really solid reasons why adobe is doing so well in this video. I am going to give you some really useful insight into adobe show you my dcf model and tell you what my target share price for adobe is just before we get started.

Remember that this video is just my personal opinion. I am not a financial advisor. I can't provide financial advice to you and if you do need financial advice, please make sure you go and seek the help of a suitably qualified professional. Now, just in case you don't know what adobe is they are a software company focused on the creative industries? They have a number of products that help people who work with photo video and audio content, in particular outside of professional grade software, that mere mortals, like me, can't afford.

Adobe is far and away the market leader with photoshop and lightroom for photo editing, premiere pro for video, editing and acrobat for working pdf files. They are dominating the market, and the market that they are dominating is growing as online content, businesses grow and the use of new media grows with it now recently, adobe has actually done something really amazing. As a business, they have converted their business from generating revenue through one-off software sales to a subscription-based business, and that is a very powerful switch. Customers now pay a monthly fee to use the same adobe software that they've used over the years.

Instead of buying the software outright, and that adds up to a lot more money being paid for that same software over time in exchange, you always get the latest versions of the software. You get free upgrades as long as you have the subscription and the load of extra bells and whistles and the tools, the tools that adobe provides are great. There are some people who will say that they prefer alternatives, but the truth is the majority of the pro sumo market uses adobe suite. I personally use it for my online content business.

I use it for this youtube video i use it for my channel and for my websites as well and as a user. I am extremely happy with the product. The monthly subscription in the us is 50 per month for individual users and eighty dollars per month for businesses and prices around the world, including uks, somewhat similar for me and many other businesses. That is actually really good value.

Hence why adobe has been doing so well. Revenue has been growing very steadily from just 5.8 billion, just in 2016 to 12.9 billion dollars in 2020., there's an annual rate of 22 on growth, which is already very, very good for such a large company, but it gets even better than that. Ebitda has been growing too. In fact, all income metrics have been growing at a phenomenal pace, but in particular on the net front, they've been doing really well.

In 2016, ebitda was already very high at 31 of revenue, but in 2020 it was up to 37.4 percent. In the first two quarters of this year of 2021, ebitda is running at 44, which is nothing short of incredible, and the unleaved cash flow is running at 39. That is not only really good. That is really good even compared to other software companies.

Adobe is really doing some incredible work on the numbers front, putting it simply. That is the amount of cash that adobe gets from a business that it can then decide to reinvest, buy the companies with pay out dividends or whatever else they choose to do with it. Adobe is literally printing money for free here and naturally enough. The market has recognized this.

The share price has exploded and adobe's currently trading at 620 dollars per share, as i'm recording this video. So how much more can adobe grow and what is a fair target price, in my opinion? Well, here is my dcf model. Remember this is just my model. I am a random guy on youtube, sharing my opinion.

So do your own research and make sure you run your own numbers so that you can have your own assumptions that you base your own decisions on. Don't listen to anybody, make sure you do your own homework anyway. Here is my version. The revenue for adobe in the first two quarters was 7.74 billion dollars and adobe themselves have projected a total annual revenue of 15.45 billion dollars for 2021 in march.

So i have assumed that they actually go and beat their own projections for the second half this year. By about 12 and that they also continue banking, the same incredible ebitda 44 of their revenue, which gives me an ebitda of 7.2 billion dollars for 2021.. From there i have assumed a 30 growth per year that is a little higher than it has been in recent years, but i expect that that online content industry is going to continue growing at a fast rate, sustaining the level growth of the next three to four Years and it's also possible that adobe might actually squeeze that margin on their profit even more than they already have. Now i have done the usual extrapolation of the other key numbers.

The tax rate here is set to 21 and the discount rate to 10 percent. I actually think 10 is probably about right here. Adobe's networking capital for the year is currently trending negative and i have assumed that it ends the year on negative 400 million dollars. You can see that it's positive in the model, because i'm subtracting a negative number to get to my unleaved free cash flow number.

It doesn't really matter, though, if i go and change it to something else, it only really moves the share price by a few cents. So i've just left it at that then assuming a four percent growth rate for the perpetual model from the end of the five year window over which i'm modeling and a 15 times multiplier in five years time. I get a target share price of 490 to 610 and i know that some people might say that the terminal value multiplier should be higher, but i've already assumed some pretty racy assumptions on the growth level and although adobe is growing pretty fast at the 22 level, Right now, it's not going as fast as some other companies where i would use a higher multiplier. So i'm pretty happy with that.

In fact, even if i set the multiplier to 20 and use the upper band of my share price range for the target, i still only get a 26 upside. So i think the assumptions here are actually a little too ambitious when you use all the maximum potential values, so i'm not going to be doing that. So, given the current share price, as i'm recording this video 620, i actually feel that adobe share price. At the moment is overvalued, remember that this type of model always gives you the present value of the fair target price.

That's the price. I feel the share price should be today, given the assumptions that i'm putting into the model not the share price in one year or in five years or at some point in the future. So, in this case, the model is telling me that the share price right now is two percent overvalued. Using my pretty aggressive 30 per year, growth rate assumption and i've actually held a long position in adobe until today, but i've just sold off all of my shares and i no longer hold any position adobe, including my man versus the market portfolio.

So that's the first sale that i've made in that portfolio and i'm moving the money to other places. I love the product, i love the company. I personally use their products and i really really like them. I think they're great value, but in my view the stock is just priced too high, so i've taken my gains and put my funds into some other stocks today, higher expectations and great for if you found this useful, if you enjoyed it, please don't forget to smash Like button for the youtuber algorithm, thank you so much also, thank you very, very much for watching this video and, as always i'll see you guys later, you.