Billy Fitzsimmons: We recently took a fresh look at Adobe and maintained our wide moat, stable trend rating, and we raised our fair value estimate to $300 per share. Adobe has been a top performer in recent years, but we believe the recent sell-off across enterprise software in the last month makes this an attractive point of entry for this 4-star name set to grow its top line at 20%-plus next fiscal year.
As a reminder, Adobe has a few key segments, with the two largest being Digital Media and Digital Experience.
First, Digital Media is where Adobe's flagship offering, Adobe Creative Cloud, a SaaS offering where products like Photoshop and Dreamweaver, is housed. Creative Cloud is the gold standard for photographers, videographers, animators, and graphic and web designers. Essentially if you work in any creative field you need to know how to use Adobe's products.
The second business is Digital Experience, with the Flagship offering being Adobe Experience Cloud for digital marketing. Experience Cloud is composed of Analytics Cloud, Marketing Cloud, and Advertising Cloud. This is for launching multichannel marketing campaigns. If you are Nike and want to target a specific subset of the population across email, television, social media, and the web, and receive direct analytics around the engagement, you need Experience Cloud. Marketing is one pillar under the CRM umbrella and even in a very competitive CRM market, Adobe maintains dominant market share.
Lastly, while Adobe historically has not been a highly acquisitive company, the firm had two large deals this year: Magento for digital commerce and Marketo for lead management. Overall, we think both submarkets remain in land-grab mode. Estimates suggest that the aggregate CRM market in 2016 was $36 billion and it is projected to be $79 billion in 2022.
In terms of the financials, this is a name where investors glance at the P/E and balk, but you have to remember that this is a company with almost 90% gross margins and 30% GAAP operating margins. Operating margins are still expanding, and EPS has grown and will grow anywhere from 40% to 100% year over year. This is a company committed to reducing its shares outstanding; it added $8 billion to its buyback program, something of a rarity in the high growth enterprise software space.