Down 14% In The Last Trading Session, Where Is Adobe Stock Headed?

Adobe’s stock (NASDAQ
NDAQ
: ADBE
DBE
) has lost 17% in 2024 as compared to the 7% rise in the S&P500 index over the same period. Further, the stock price dropped 13.7% on Friday vs a 0.7% gain in the broader index. The decline came after the firm posted lower-than-expected revenue guidance for Q2. It raised concerns about the slow growth in revenues from ADBE’s generative artificial intelligence tools. Overall, ADBE stock is currently trading around $492, which is 19% below its fair value of $607 – Trefis’ estimate for Adobe’s valuation.

Amid the current financial backdrop, ADBE stock has seen little change, moving slightly from levels of $500 in early January 2021 to around $490 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. Overall, the performance of ADBE stock with respect to the index has been quite volatile. Returns for the stock were 13% in 2021, -41% in 2022, and 77% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that ADBE underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ADBE face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company outperformed the consensus estimates in the first quarter of FY2024 (Q1 FY’24 refers to the quarter that ended on March 1, 2024), with revenues increasing 11% y-o-y to $5.18 billion. It was driven by a 12% growth in the digital media unit and a 10% rise in the digital experience segment. In addition, the digital Media ARR (Annualized Recurring Revenue) increased from $13.67 billion to $15.76 billion. On the cost front, total expenses as a % of revenues witnessed an unfavorable rise, primarily due to a $1 billion acquisition termination fee (related to ADBE’s efforts to acquire Figma). Altogether, the net income declined by 50% y-o-y to $620 million.

The top line improved 10% y-o-y to $19.41 billion in FY 2023. It was primarily due to an 11% gain in digital media revenues, which benefited from growth in both the creative cloud and document cloud categories. Notably, the digital media segment contributes more than 70% of the total revenues. Further, the digital experience division also posted an 11% increase. On the expense side, operating margin slightly decreased from 34.6% to 34.3%. All in all, the net income improved 14% y-o-y to $5.4 billion.

Moving forward, the firm expects the second quarter (FY2024) revenues and earnings to remain between $5.25-$5.30 billion and $3.35-$3.40, respectively. Overall, Adobe’s revenues are forecast to touch $21.49 billion in FY2024. Further, ADBE’s net income margin is likely to see some drop in the year. It will likely result in a net income of $5.58 billion and an annual GAAP EPS of $12.37. This coupled with a P/E multiple of just above 49x will lead to a valuation of $607.

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