Stock Analysis on Net
Stock Analysis on Net

Adobe Inc. (NASDAQ:ADBE)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Adobe Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 16.07%
01 FCFF0 7,027
1 FCFF1 8,760 = 7,027 × (1 + 24.66%) 7,547
2 FCFF2 10,652 = 8,760 × (1 + 21.60%) 7,907
3 FCFF3 12,628 = 10,652 × (1 + 18.55%) 8,076
4 FCFF4 14,583 = 12,628 × (1 + 15.49%) 8,035
5 FCFF5 16,396 = 14,583 × (1 + 12.43%) 7,784
5 Terminal value (TV5) 506,683 = 16,396 × (1 + 12.43%) ÷ (16.07% – 12.43%) 240,530
Intrinsic value of Adobe Inc. capital 279,878
Less: Debt, including current portion (fair value) 3,390
Intrinsic value of Adobe Inc. common stock 276,488
 
Intrinsic value of Adobe Inc. common stock (per share) $617.16
Current share price $477.12

Based on: 10-K (reporting date: 2023-12-01).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Adobe Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 213,750 0.98 16.29%
Debt, including current portion (fair value) 3,390 0.02 2.34% = 2.77% × (1 – 15.44%)

Based on: 10-K (reporting date: 2023-12-01).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 448,000,000 × $477.12
= $213,749,760,000.00

   Debt, including current portion (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (20.16% + 20.84% + 15.48% + 21.00% + 7.90% + 7.27%) ÷ 6
= 15.44%

WACC = 16.07%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Adobe Inc., PRAT model

Microsoft Excel
Average Dec 1, 2023 Dec 2, 2022 Dec 3, 2021 Nov 27, 2020 Nov 29, 2019 Nov 30, 2018
Selected Financial Data (US$ in millions)
Interest expense 113 112 113 116 157 89
Net income 5,428 4,756 4,822 5,260 2,951 2,591
 
Effective income tax rate (EITR)1 20.16% 20.84% 15.48% 21.00% 7.90% 7.27%
 
Interest expense, after tax2 90 89 96 92 145 83
Interest expense (after tax) and dividends 90 89 96 92 145 83
 
EBIT(1 – EITR)3 5,518 4,845 4,918 5,352 3,096 2,674
 
Debt, current portion — 500 — — 3,149 —
Debt, excluding current portion 3,634 3,629 4,123 4,117 989 4,125
Stockholders’ equity 16,518 14,051 14,797 13,264 10,530 9,362
Total capital 20,152 18,180 18,920 17,381 14,668 13,487
Financial Ratios
Retention rate (RR)4 0.98 0.98 0.98 0.98 0.95 0.97
Return on invested capital (ROIC)5 27.38% 26.65% 25.99% 30.79% 21.11% 19.82%
Averages
RR 0.98
ROIC 25.29%
 
FCFF growth rate (g)6 24.66%

Based on: 10-K (reporting date: 2023-12-01), 10-K (reporting date: 2022-12-02), 10-K (reporting date: 2021-12-03), 10-K (reporting date: 2020-11-27), 10-K (reporting date: 2019-11-29), 10-K (reporting date: 2018-11-30).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 113 × (1 – 20.16%)
= 90

3 EBIT(1 – EITR) = Net income + Interest expense, after tax
= 5,428 + 90
= 5,518

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [5,518 – 90] ÷ 5,518
= 0.98

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 5,518 ÷ 20,152
= 27.38%

6 g = RR × ROIC
= 0.98 × 25.29%
= 24.66%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (217,140 × 16.07% – 7,027) ÷ (217,140 + 7,027)
= 12.43%

where:

Total capital, fair value0 = current fair value of Adobe Inc. debt and equity (US$ in millions)
FCFF0 = the last year Adobe Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Adobe Inc. capital

FCFF growth rate (g) forecast

Adobe Inc., H-model

Microsoft Excel
Year Value gt
1 g1 24.66%
2 g2 21.60%
3 g3 18.55%
4 g4 15.49%
5 and thereafter g5 12.43%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 24.66% + (12.43% – 24.66%) × (2 – 1) ÷ (5 – 1)
= 21.60%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 24.66% + (12.43% – 24.66%) × (3 – 1) ÷ (5 – 1)
= 18.55%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 24.66% + (12.43% – 24.66%) × (4 – 1) ÷ (5 – 1)
= 15.49%