Adobe (NASDAQ:ADBE) has once again shown with its financial results for its fiscal quarter ending Dec. 3, 2021 that it is a free cash flow (FCF) powerhouse. Its latest earnings released on Dec. 16 proved that again. As a result, ADBE stock is likely to power significantly higher this year.
But, hey, don’t tell the stock market this news. It seems to think Adobe is having some sort of crisis or something. For example, ADBE stock has fallen dramatically since reaching a peak on Nov. 19. This was about a month before the fourth quarter (Q4) results came out on Dec. 16.
The stock closed at $688.37 on Nov. 19 and then subsequently dropped over 28% to just below $500 ($493.05) as of Jan. 27, 2022. Only recently has ADBE stock started to recover. As of Feb. 2, it closed at $533.o9.
But it has much more to go on the upside. This article will help explain why and where ADBE stock could end up this year.
Where Things Stand With ADBE Stock
There really seems to be no rhyme or reason for the recent plunge in the stock. It is not as if the company projected out lower revenue or some sort of loss-making scenario.
In fact, revenue was up 20% for Q4 and higher by 23% to $15.79 billion for the full fiscal year. Moreover, Adobe projected that its coming fiscal year will produce $17.9 billion in sales in its slide presentation. That represents potential sales growth of 13.3%.
However, that is lower than its historical growth rate in the 20%-plus range, at least over the last five years. This is based on the company’s own historical analysis in the slide deck. So maybe the market is upset with that lower projection.
But that is not the full story. In the past year, Adobe produced a huge amount of FCF. For example, in Q4 it made almost $2.0 billion in FCF ($1.967 billion), and for the full year, it generated $6.88 billion in FCF. That was 30% higher than the $5.3 billion in FCF it made last year.
In other words, the company is a cash cow. It generates a large amount of cash from the revenue it produces. As revenue rises, the FCF grows even higher.
This is because its FCF margin was very high at 43.6% (i.e., $6.88b/$15.79b). Moreover, this was also significantly higher than its prior-year FCF margin of 41.84% (i.e., $5.3b/12.87b).
Where This Leaves Adobe Going Forward
Analysts now forecast that sales could reach nearly $18 billion by Nov. 2022 and $20.6 billion in 2023. If we apply the 44% FCF margin to the 2023 sales forecast, FCF could reach $9.06 billion by Nov. 2023. That is around 24% higher than its existing FCF of $6.88 billion.
Now this means that using a 3% FCF yield metric the total market cap could rise to $301 billion. That is seen by taking its forecast FCF of $9.06 billion and dividing it by 3%. That produces a market cap estimate of $301 billion, which is 19.7% over today’s $251.5 billion market value.
In other words, using a very conservative estimate at a 3% FCF yield metric, ADBE stock is worth at least 20% more or $638 per share.
However, with even just a slightly better FCF yield metric, the stock could be significantly higher. For example, using a 2% FCF yield metric, Adobe’s market cap could hit $453 billion. That represents an 80% upside and a price target of $960 per share.
What to do With ADBE Stock
Adobe makes a ton of FCF. Its 44% FCF margin is one of the highest in the technology world. The market does not completely appreciate this. As a result, it does not need a lot of growth since the cash it generates will produce many opportunities for the company.
Patient value investors will take advantage of this lull in the stock price and gobble up shares at these bargain prices. ADBE stock could rise anywhere from 20% to 80% over the next two years. Conservatively we can say it’s worth at least 50% more in the next year, or $800 per share.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.
