Stock Analysis & Ideas

Adobe Stock: Looks Intriguing after Recent Earnings Flop

Shares of Adobe (ADBE) have been sinking lower alongside most other high-tech stocks with high multiples. With an earnings miss behind it and a now lower bar, the stock looks quite compelling near $430 per share.

Indeed, Adobe’s quarterly results were not pretty. With rates on the 10-year note flirting with 3%, there are many reasons to sell now and ask questions later. Despite having the tides turned so heavily against it, there are reasons to give the creative software developer the benefit of the doubt. It has a great product and a moat that’s quite sizeable.

Still, much of the robust earnings growth prospects and high caliber of management are already baked into the stock, with shares now trading at 42.5 times trailing earnings. Adobe is a leader with the ability to extend its lead with its incredibly innovative team. However, just how much investors should be willing to pay in a rising-rate environment remains the big question.

We’ve witnessed market leaders suffer epic falls on underwhelming quarterly earnings results over the past quarter. While I do not doubt Adobe’s ability to execute in a more challenging environment, the valuation remains too rich for my liking.

For over 12.5 times sales and over 40 times trailing earnings, there’s still quite a bit of expectation baked in. For that reason, I am neutral on ADBE stock.

Adobe Stock: One Bad Quarter in the Rear-View

The question on the minds of investors is, has Adobe already ripped the band-aid off with its first-quarter round of results?

The first quarter saw a decent beat, but investors were not impressed with the guide. Indeed, Adobe is one of many companies out there that’s losing some business from the Ukraine-Russia crisis.

Looking ahead, the second quarter could be the “two” in the one-two punch we’ve witnessed firms like Netflix (NFLX) fall to the canvas over. Unlike Netflix, however, I don’t think Adobe is in trouble as it looks to hike prices across its suite of sticky offerings. The company is moving forward with raising the price of its Creative Cloud subscription service by a very modest amount of nearly 4%.

Given Adobe’s product is the gold standard among many of its professional users, I don’t see much, if any, resistance as the company increases the sticker price.

Though the Ukraine-Russia crisis adds a layer of uncertainty to the year’s outlook, I don’t think Adobe will be one of the stocks that will stand to shed over half of its value. The company’s innovative capabilities will shine through over the long term. Digital Media revenue, which comprises a majority of overall revenues, is incredibly hot, with many secular tailwinds powering it.

Arguably, the rise of augmented and virtual reality experiences could bolster growth in the segment. Though the timeline for when “the metaverse” will be ready for mainstream audiences is unclear, I do view the rise of immersive worlds as a potential wildcard tailwind for Adobe and other creativity software developers over the course of the next decade.

This tailwind alone, I believe, could more than justify Adobe’s lofty multiple. Of course, timing when the tailwind will come into full force remains the question mark at this juncture.

Wall Street’s Take

Turning to Wall Street, ADBE stock comes in as a Strong Buy. Out of 26 analyst ratings, there are 21 Buy recommendations and five Hold recommendations.

The average Adobe price target is $567.64, implying upside potential of 32.6%. Analyst price targets range from a low of $455.00 per share to a high of $650.00 per share.

Many analysts have been quick to downgrade after the fact on certain high-tech stocks that faltered on earnings. Adobe is not one of them.

Wall Street analysts remain bullish, and I think they’re right to stand by the name as shares slip. The growth story is as strong as ever, but there will be bumps in the road due to exogenous factors.

The Bottom Line on Adobe Stock

Adobe stock has been rolling over alongside the Nasdaq 100 these days. Unlike some of the other big-tech firms that crashed violently (think Netflix), I view Adobe as a durable firm that can hold its own, even as America looks to flirt with a recession.

With a wide moat and above-average pricing power, I’d look for Adobe to move through these inflationary times with ease. The real risk lies on the geopolitical front. Should the Ukraine-Russia conflict come to a peaceful resolution, Adobe could have a heavy weight lifted off its shoulders.

For now, the company is continuing to innovate, and the long-term fundamentals still hold up. With a “metaverse” wildcard and incredible growth potential in digital media, it’s tough not to be a fan of Adobe, even though growth has soured.

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