AI secular fears are rampant. The CEO just resigned. The stock is down almost 30% YTD. Time to take a look at Adobe ($ADBE) through the PULSE framework to see if it's worth a deep dive?
A screen should help decide where to spend research time, not replace research. When a company still shows durable cash generation, strong economics, and balance-sheet strength after a sharp repricing, that is usually where deeper work starts becoming worthwhile.
Gary, I'm curious about your EV cap rate. A company is capitalized via debt and equity, not cash and debt. In fact cash isn't a productive asset so some might argue that it should be a net debt and equity calculation. I welcome your comment
James - on your EV comment, it appears he calculates EV exactly as you suggest: EV = Market Cap + Debt - Cash. Putting numbers in: EV = 102,159 + 6,656 - 6,332 = 102,483 (the market cap figure I got from Bloomberg and is not shown explicitly in Gary's post). But then Gary; if I could add on a question to the EV cap rate calcualtion, how do you source your 317 depreciation figure (that goes into NOPAT)? I see 512 for FY25, or 511 for LTM. I've read your other PULSE posts with interest too, and in each of those cases I haven't been able to match your depreciation in any case (MSFT, NOVOB, IBM), so preumably you're doing some kind of adjustment to reported numbers?
I will double check, but I believe the PULSE template uses a 5-year average depreciation % sales applied to LTM sales. Again, idea is to be roughly right at this stage
I calculate EV = Market Cap + Debt - Cash. I should also add in Preferred, but for most companies it's not material and the goal is to get a rough sense of where things stand before deciding whether to do more work
Good framework for triage. I recently published my own ADBE deep dive and landed at $248/share fair value using a 5-year DCF with SBC-adjusted free cash flow and a 10,000-iteration Monte Carlo. The PULSE signals you're flagging (strong economic profit, rising FCF, zero leverage) are all real, but the FCF picture changes materially when you subtract $1.94B in annual stock-based compensation. That knocks ~20% off the headline free cash flow number and shifts the Smoothed FCF yield from "interesting" to "fair." It's the difference between a stock that screens as cheap and one that's priced about right. I'd be curious how the PULSE framework handles SBC-heavy companies where reported FCF overstates cash available to shareholders.
That is the key distinction.
A screen should help decide where to spend research time, not replace research. When a company still shows durable cash generation, strong economics, and balance-sheet strength after a sharp repricing, that is usually where deeper work starts becoming worthwhile.
the timing of this fundamental and highly transparent fundamental post could not have been better. (i also like the youtube companion)
why? because there is a tremendous amount (due to company size and sector) of high quality debate for the narrative that FOLLOWS.
2 examples of opposing views :
https://secondactsbiz.substack.com/p/adobe-the-transformation-that-everyone
https://redeyereturns.substack.com/p/why-the-agentic-evolution-preserves
I appreciate the kind words
Gary, I'm curious about your EV cap rate. A company is capitalized via debt and equity, not cash and debt. In fact cash isn't a productive asset so some might argue that it should be a net debt and equity calculation. I welcome your comment
James - on your EV comment, it appears he calculates EV exactly as you suggest: EV = Market Cap + Debt - Cash. Putting numbers in: EV = 102,159 + 6,656 - 6,332 = 102,483 (the market cap figure I got from Bloomberg and is not shown explicitly in Gary's post). But then Gary; if I could add on a question to the EV cap rate calcualtion, how do you source your 317 depreciation figure (that goes into NOPAT)? I see 512 for FY25, or 511 for LTM. I've read your other PULSE posts with interest too, and in each of those cases I haven't been able to match your depreciation in any case (MSFT, NOVOB, IBM), so preumably you're doing some kind of adjustment to reported numbers?
I will double check, but I believe the PULSE template uses a 5-year average depreciation % sales applied to LTM sales. Again, idea is to be roughly right at this stage
I calculate EV = Market Cap + Debt - Cash. I should also add in Preferred, but for most companies it's not material and the goal is to get a rough sense of where things stand before deciding whether to do more work
Good framework for triage. I recently published my own ADBE deep dive and landed at $248/share fair value using a 5-year DCF with SBC-adjusted free cash flow and a 10,000-iteration Monte Carlo. The PULSE signals you're flagging (strong economic profit, rising FCF, zero leverage) are all real, but the FCF picture changes materially when you subtract $1.94B in annual stock-based compensation. That knocks ~20% off the headline free cash flow number and shifts the Smoothed FCF yield from "interesting" to "fair." It's the difference between a stock that screens as cheap and one that's priced about right. I'd be curious how the PULSE framework handles SBC-heavy companies where reported FCF overstates cash available to shareholders.