First, I preface this by saying that I have followed Adobe for my entire career. The company has transitioned like many software companies to a recurring revenue business model across all of its products, something investors love to love. They reported last night and the print was solid, adding $432 million in net new ARR (annualized recurring revenue) versus their guide of $410 million, a 5% beat. Could they have done $20 million more? Who knows but as they said on the conference call, they were very pleased and the March month will begin the ramp of several new products including the AI creation tool FireFly. For all the controversy of are they an AI winners or loser, keep in mind wherever content is created isn’t as important as it needs editing for any professional use cases, Adobe’s specialty.
Ok, so that in mind, the stock last night dropped quickly on the results with sleuths like myself wondering why the guide in the press release didn’t include a reiteration for the year they guided last December. Well, management addressed it head on with the answer being they are reiterating and hope to beat it as well!
Another snippet from the conference call.
Sure, could someone have expected somehow for them to raise their annual guidance one quarter into the year? Seems silly to me, especially for a less demanding P/E, 25x the next fiscal. Consider CRM which underwhelms most quarters, talks up an AI story and has a multiple of 30x for lesser growth?
Importantly they have their Adobe Summit Event on March 26 which should bring renewed enthusiasm in my opinion. In any case, buying a recurring revenue, category leader with an accelerating 2H in front at a good risk reward is a long in my book. I bought last night after hours and will add this morning.
Our next idea is long Dell Computer. The company delivered a strong set of results last quarter with first signs of AI servers generating meaningful impact to their order book and backlog. Remember Dell is a cash flow machine even in the worst of times which they are exiting as client PC refresh has been seeing a hang over for quite awhile and the PC server market the same. The stock reacting very favorably to their EPS report rising to $125 per share which at that point was still a reasonable 5% FCF yield and 15x earnings! Since then? A drop to $106 which we deem to be mostly due to the pre-planned 144 stock sales by Michael Dell. That’s life in most all technology stocks whether its Apple, Nvidia, Avago or Dell. Having said that, we like the entry point alot and we think a catalyst is upon us for next week’s GTC Summit hosted by Nvidia.
A boutique shop named Lynx which does terrific digging and primary research had a piece yesterday:
First, I do not think many realize Dell will be presenting at GTC, let alone possible government wins (of course Dell is the safe bet versus controversial SMCI!) Second, traction at a large hyperscale like META would be a big deal and has a long tail to it. The picture ahead for Dell is three-fold: 1) the PC upgrade cycle should begin to hit its inflection in the 2H of 2024 and last 2-3 years 2) the AI server market for the enterprise which carries a long tail of services to Dell and the 3) the AI PC which is drawing much excitement from motherboard and assembly makers in Asia right now. From the conference call:
In summary, two very good companies, very high free cash flow, at reasonable multiples and are getting a chance to buy them on a nice pullback. We like this opportunity.
Rob’s Educated Guesses