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Adobe more than justifies its valuation

Huge cash conversion capabilities mean this tech pioneer has further to grow
Adobe more than justifies its valuation

Justifying a cash-adjusted price to forecast earnings valuation of 48 times is no mean feat. Adobe (US:ADBE) – whose share price has been swept up in the unbelievable momentum behind US tech companies – makes it possible. The top-performing LF Blue Whale Growth, which features as this week’s fund tip certainly thinks so, as it now counts Adobe as its number one holding.

IC TIP: Buy at $471
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

High-quality earnings

Consistent double-digit revenue growth and widening margins

Share EPS-enhancing buybacks

Well-placed products for an increasingly digital world

Bear points

Recent expensive acquisitions 

Share price tied up with wider tech sentiment

The company is a pioneer of digital design, developing products that span a huge range of industries and budgets – almost all of which are sold on incredibly reliable subscriptions. And the company’s super products lend themselves to super profitability. Adobe’s return on capital employed (ROCE), which indicates how effectively money invested in a business is turned into profit, hit 25 per cent in 2019, up from 10 per cent just four years previously. Importantly, those profits are converted to cash with ease: free and operating cash conversion have both averaged more than 150 per cent in the past five years.

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