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

+25.61%
Upside
483
Market
607
Trefis
ADBE: Adobe logo
ADBE
Adobe

Adobe’s stock (NASDAQ: ADBE) 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 (AI) 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 (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?

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. 

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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 (GAAP), 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.

 Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ADBE Return -12% -17% 378%
 S&P 500 Return 0% 7% 129%
 Trefis Reinforced Value Portfolio -2% 2% 626%

[1] Returns as of 3/18/2024
[2] Cumulative total returns since the end of 2016

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