Should You Buy Adobe Stock to Kick Off 2023?

For nearly every company in the software space 2022 has been a tough year, and that includes Adobe (ADBE 1.52%). Shares of the creative software leader are down roughly 40% on the year, clobbered by rising interest rates (higher rates lower the present value of stocks) and slowing growth. 

The company just wrapped up its 2022 fiscal year mostly as expected, and it reiterated decent guidance for 2023. Given all this mixed news about Adobe, is it time to buy the stock?

2022 comes to a close, and growth was solid

Adobe reported revenue of $4.53 billion to close out its fiscal 2022 (the 12-month period ended on Dec. 2), just above management's stated expectations for $4.25 billion. Adjusted earnings per share were $3.60, beating the outlook for $3.50 provided a few months ago. In all, 2022 was a decent year for Adobe.

Data source: Adobe. YOY = year-over-year.  

It's worth noting that Adobe revenue would have grown 15% in 2022 when factoring out tough currency exchange rates this year. As has been happening with other multinational companies, Adobe's international revenue has been getting hit due to a record run-up in the value of the U.S. dollar. When an international sale is made, the value of it is lowered when converted into a U.S. dollar that has been inexorably rising in value along with the Fed's interest rate hikes. Expect this effect to continue into 2023 as well.

About that 2023 outlook

Adobe reiterated the financial guidance for 2023 it provided during its investor event in October (shortly after the announced Figma acquisition). Management thinks revenue will decelerate to about a 9% pace of growth (or up 13% when excluding currency exchange headwinds). The good news is that adjusted earnings-per-share growth will edge up about 12%, driven by share repurchases, which Adobe is able to fund with its highly profitable operation.

As of this writing, Adobe stock now trades for 22 times the midpoint of 2023 adjusted earnings per share guidance. 

Is Adobe stock a buy?

Now here's where things get a bit more tricky. Based on its stand-alone expectations for 2023, Adobe stock looks like a decent value. However, it's in the process of acquiring digital design collaboration upstart Figma. At the time of the announced deal in September, the price tag was $20 billion. The purchase will be funded half with cash and half in newly issued Adobe stock, plus an additional 6 million shares issued to Figma executives and employees (currently worth over $2 billion based on Adobe's current stock price).  

Adobe had previously said Figma would exit 2022 with $400 million in annualized revenue, so $20 billion-plus is a steep price tag, and it will dilute shareholders a bit. However, Adobe is still repurchasing stock ($1.75 billion worth in Q4 2022 alone) and plans to keep doing so even after the Figma deal closes.

In addition to adding roughly $12 billion in new stock (about 8% of Adobe's current market cap of $153 billion), the company will also use up some of its cash and take on extra debt to fund the other $10 billion to take Figma. At the start of December 2022, Adobe had $6.1 billion in cash and short-term investments and $4.13 billion in total debt.

If the Figma deal gets the OK from regulators as Adobe expects it to in 2023, things could get a bit messy given the high price tag. I have my doubts, especially regarding Adobe's ability to fend off a slew of upstart competition. 

Nevertheless, excluding the acquisition, Adobe still looks like a solid bet in the cloud software market -- especially if it can keep driving high profit margins and return cash to shareholders with more share repurchases. In all, 2022 closed on a high enough note to keep shareholders pleased with Adobe headed into the new year, especially with shares trading at such a reasonable valuation right now.