Dear Adobe Investor Relations Team,
As a private shareholder of Adobe Inc., with a significant exposure I am writing to express my serious concern regarding the current disconnect between the company’s fundamental performance and its valuation in the equity market. Despite Adobe’s high profitability, dominant market position, and robust cash flows (proven again in the latest Q1 report which beat expectations across the board) the share price is trading at multi-year lows and is about to get smacked even harder following the publication of Q1 results and announcement of CEO departure. The current valuation multiples are, by historical standards and in comparison to industry peers, extremely suppressed. Even though the company boasts industry leading margins, healthy growth and a dominant ecosystem moat, it is among the worst performers in the entire software/SaaS sector. Online forums are even comparing Adobe to Paypal, and according to pre-market, Adobe will actually start trading at Paypal-like multiples (P/FCF ex. SBC < 10).
In light of this context, I believe the current capital allocation policy is overly conservative. I urge the management team and the Board of Directors to consider the following strategic actions:
- Aggressive Share Repurchases: Adobe’s balance sheet is currently under-leveraged. Following the successful capital strategies seen at peers like Salesforce and Wix.com, Adobe should take advantage of the low valuation by repurchasing shares more aggressively. This should not be limited to free cash flow alone; utilizing additional leverage to fund large-scale buybacks at these price levels is a rational decision that would significantly enhance long-term earnings per share. Salesforce announced a $50 billion buyback, partially funded by a $25 billion note offering. Wix.com is planning to retire about 40% of outstanding shares within a year by a recently announced Dutch tender offer.
- Signaling through Insider Buying: At a time when the market questions the company’s forward-looking vision, a powerful signal from leadership is essential. Especially considering the sudden departure of current CEO Narayen. Open-market share purchases by insiders would restore much-needed confidence and demonstrate that management views the current price decline as a temporary, sentiment-driven event. Again I would like to reference peers like ServiceNow or The Trade Desk, where insiders have made significant open market purchases to signal confidence in the future of the business.
It is in the best interest of loyal shareholders for Adobe to seize this unique 'SaaSpocalypse' opportunity to create significant shareholder value. When a high-quality company with such margins is spat out by the market, it is the opportune moment for decisive management to optimize the capital structure and use Adobe's pristine balance sheet to force the market to rerate the business. If and when it eventually does, share buybacks should become less and the accrued debt can be paid off to restore the balance sheet again.
With some napkin math I believe Adobe could easily target 1,5x net debt/EBITDA and use all free cash flow + proceeds from debt issuance to retire up to 23% of current shares outstanding.
I look forward to your response regarding how Adobe intends to address this significant undervaluation and hope to get some reassurance from your part to soften the lossen I am incurring this year while I hold on to my shares and hope for a trend reversal in market perception.
Sincerely,
Fernando
Scenario-analyse voor Adobe
Scenario 1 — AI wordt een groeimotor (bull case)
Scenario 2 — AI verhoogt concurrentie (base case)
Scenario 3 — echte disruptie (bear case)
