Stock Analysis & Ideas

Wall Street Continues to be Cautiously Bullish on Adobe. Here’s Why

Shares of software company Adobe (NASDAQ: ADBE) are down 32.3% year-to-date amid a broader tech sell-off, as investors have been looking for safer, value bets amid rising interest rates. Further, Adobe’s lackluster guidance for the fiscal third quarter also impacted investors’ sentiment. While a challenging environment is expected to weigh on the company’s near-term performance, Wall Street analysts continue to be optimistic about Adobe’s long-term growth opportunities.

Adobe offers an extensive range of software solutions, including creative, marketing, and document management tools.

Adobe’s Guidance Reflects Near-Term Pressures

Adobe’s Q2 FY22 (ended June 3, 2022) revenue grew 14% to $4.39 billion. The top-line benefited from strong demand for the company’s Digital Media and Digital Experience offerings, driven by the ongoing digital transformation of enterprises. Adjusted EPS increased nearly 11% to $3.35.

Despite upbeat Q2 results, investors were disappointed due to the company’s Q3 guidance, which reflected the impact of foreign exchange headwinds and summer seasonality. The outlook also included the impact of the company’s decision to cease its sales in Russia and Belarus.

Adobe expects FY22 revenue of $17.65 billion (reflecting nearly 12% growth), driven by an estimated 12% increase in the Digital Media segment revenue and a 14% rise in the Digital Experience segment revenue.  

Wall Street’s Take

Many analysts lowered their price target for Adobe stock after the company issued a dismal outlook for Q3 FY22.

Mizuho Securities analyst Gregg Moskowitz noted that the Q3 forecast was much worse than anticipated, and reflects a notable quarter-over-quarter decline in net new Digital Media annual recurring revenue due to more pronounced summer seasonality and higher currency headwinds.

Moskowitz added that while it is interesting that Adobe expects a materially better Q4, however, given the current environment, he “would expect much skepticism until it proves otherwise.” The analysts finds the Q4 outlook “perplexing” but continues to believe that Adobe is very well positioned to benefit from digital transformation.

Moskowitz slashed his price target to $480 from $530 and maintained a Buy rating on Adobe stock.

Overall, Adobe scores the Street’s Strong Buy consensus rating based on 17 Buys and four Holds. The average Adobe price target of $458.67 implies 19.40% upside potential from current levels.

Tying the Tech Together

Most of the Wall Street analysts are looking beyond the short-term pressures that Adobe is facing, and are optimistic about the company’s future growth based on continued demand for its creative and marketing solutions. The ongoing digital transformation of enterprises bodes well for Adobe. With a strong underlying business model and continued innovation, Adobe is poised to capture additional business in a huge addressable market worth over $200 billion.

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