Down 8% YTD, What To Expect From Adobe Stock In Q1?

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Adobe (NASDAQ: ADBE) is scheduled to report its fiscal Q1 2024 results on Thursday, March 14 (after market close). We expect Adobe to edge past the consensus estimates of revenues, but earnings are likely to miss the mark. The technology giant surpassed the street estimates in the last quarter, with total revenues increasing 12% y-o-y to $5.05 billion. The growth was mainly because of a 13% rise in the digital media segment and a 10% gain in the digital experience division. We expect the first-quarter results to be on similar lines. Our interactive dashboard analysis on Adobe’s Earnings Preview has more details (Note – Adobe’s FY’23 ended on December 1, 2023). 

Amid the current financial backdrop, ADBE stock has witnessed gains of 10% from levels of $500 in early January 2021 to around $550 now, vs. an increase of about 35% 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, 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 (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 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Our forecast indicates that Adobe’s valuation is $633 per share, which is 15% above the current market price of just above $552. 

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(1) Revenues likely to edge past the consensus estimates

Adobe’s revenues grew 10% y-o-y to $19.41 billion in FY 2023. It was due to an 11% rise in the digital media division, followed by a similar increase in the digital experience unit. 

  • The digital media segment benefited from a 10% y-o-y growth in the creative cloud and a 13% increase in the document cloud sub-segments. Further, the segment’s annualized recurring revenue (“ARR”) improved by 14% to $15.17 billion. We expect the same trend to continue in Q1 FY2024.
  • The digital experience revenues rose by 11% y-o-y to $4.9 billion in the year. We expect the Q1 results to be on similar lines.
  • Overall, we forecast Adobe’s revenues to touch $21.47 billion in FY 2024.

Trefis estimates Adobe’s fiscal Q1 2024 revenues to be around $5.17 billion, slightly above the $5.14 billion consensus estimate. 

(2) EPS to miss the consensus estimates

Adobe Q1 FY2024 adjusted earnings per share (Non-GAAP EPS) is expected to be $4.31 per Trefis analysis, which is 2% below the consensus estimate of $4.38. The net income improved 14% y-o-y to $5.4 billion in FY 2023. While total expense as a % of revenues was at par with the previous year’s figure, the bottom line benefited from higher revenues and an increase in non-operating income. We expect the net income to see year-on-year growth in Q1. Overall, Adobe’s annual GAAP EPS is estimated to be around $12.38 in FY2024. 

(3) The stock price estimate is 15% higher than the current market price

We arrive at Adobe’s valuation, using an EPS estimate of around $12.38 and a P/E multiple of just above 51x in fiscal 2024. This translates into a price of $633, which is 15% above the current market price. 

Note: P/E Multiples are based on Share Price at the end of the year and reported (or expected) Adjusted Earnings for the full year 

 Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ADBE Return -2% -8% 436%
 S&P 500 Return 1% 7% 129%
 Trefis Reinforced Value Portfolio 0% 5% 644%

[1] Returns as of 3/11/2024
[2] Cumulative total returns since the end of 2016

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