Up 77% Last Year, What To Expect From Adobe Stock?

+17.54%
Upside
539
Market
633
Trefis
ADBE: Adobe logo
ADBE
Adobe

Adobe’s stock (NASDAQ: ADBE) has lost 4% in 2024 as compared to the 1% drop in the S&P500 index over the same period. Further, ADBE stock is currently trading around $572, which is 10% below its fair value of $633 – Trefis’ estimate for Adobe’s valuation.

Amid the current financial backdrop, ADBE stock has witnessed gains of 15% from levels of $500 in early January 2021 to around $570 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in ADBE stock has been far from consistent. Returns for the stock were 13% in 2021, -41% in 2022, 77% in 2023, and -4% in 2024 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and -1% in 2024 (YTD) – indicating that ADBE underperformed the S&P in 2021, 2022 and 2024. 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 AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN.  In contrast, the Trefis High Quality (HQ) 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, 2022, and 2024 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company outperformed the street estimates in the fourth quarter of FY2023 (Q4 FY’23 refers to the quarter that ended on December 1, 2023), with revenues increasing 12% y-o-y to $5.05 billion. It was primarily because of a 13% rise in the digital media unit and a 10% growth in the digital experience revenues. Markedly, the subscription-based revenues contributed around 94% of the top line. On the cost front, the operating margin increased from 33.3% to 34.5% in the quarter, resulting in a net income of $1.48 billion – up 26% y-o-y.

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The top line grew 10% y-o-y to $19.41 billion in FY 2023. It was driven by an 11% increase in the digital media segment, followed by a similar rise in the digital experience division. Notably, the digital media unit benefited from a 13% increase in the document cloud and a 10% improvement in the creative cloud revenues. On the expense side, total expenses as a % of revenues slightly increased in the year. Overall, the net income improved 14% y-o-y to $5.4 billion. 

Moving forward, the firm expects the first quarter (FY2024) revenues and earnings to remain between $5.10-$5.15 billion and $3.35-$3.40 (GAAP) respectively. Altogether, Adobe’s revenues are estimated to touch $21.47 billion in FY2024. Further, ADBE’s net income margin is likely to see a slight decrease in the year. It will likely result in a net income of $5.58 billion and an annual GAAP EPS of $12.38. This coupled with a P/E multiple of just above 51x will lead to a valuation of $633.

 Returns Jan 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ADBE Return -4% -4% 455%
 S&P 500 Return -1% -1% 112%
 Trefis Reinforced Value Portfolio -4% -4% 583%

[1] Month-to-date and year-to-date as of 1/4/2024
[2] Cumulative total returns since the end of 2016

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