Adobe Stock Down 23% YTD; Can Q2 Results Reverse The Trend?

Adobe (NASDAQ: ADBE) stock has lost 23% YTD as compared to the 12% rise in the S&P 500 index. In sharp contrast, Adobe’s peer Oracle (NYSE: ORCL) is up 20% over the same period. Further, ADBE is scheduled to report its fiscal Q2 2024 results on Thursday, June 13. We expect it to top the street estimates for revenues, while earnings are likely to match (just above) the expectations. The technology giant outperformed the consensus estimates in the last quarter, with total revenues increasing 11% y-o-y to $5.18 billion. It was due to a 12% gain in the digital media and a 10% improvement in the digital experience divisions. In addition, the digital Media ARR (Annualized Recurring Revenue) rose from $13.67 billion to $15.76 billion. We expect the second-quarter results to follow the same trend. 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 seen little change, moving slightly from levels of $500 in early January 2021 to around $460 now, vs. an increase of about 45% 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 AVGO, 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 $607 per share, which is 32% above the current market price of $460.

(1) Revenues likely to edge past the consensus estimates

Adobe’s revenues grew 10% y-o-y to $19.41 billion in FY 2023, driven by an 11% increase in the digital media and a similar increase in the digital experience segments. Further, the same momentum continued in the first quarter of 2024, with both digital media and digital experience units posting growth. We expect the Q2 FY2024 results to be on similar lines. Altogether, we forecast Adobe’s revenues to touch $21.49 billion in FY 2024.

Trefis estimates Adobe’s fiscal Q2 2024 revenues to be around $5.33 billion, 1% above the $5.29 billion consensus estimate.

(2) EPS to match (just above) the consensus estimates

Adobe Q2 FY2024 adjusted earnings per share (Non-GAAP EPS) is expected to be $4.42 per Trefis analysis, which is just above the consensus estimate of $4.39. The net income increased 14% y-o-y in FY 2023. However, it witnessed an unfavorable drop in the first quarter of 2024 – down 50% y-o-y to $620 million, due to a $1 billion acquisition termination fee. We expect the net income to improve in Q2. Overall, Adobe’s annual GAAP EPS is estimated to be around $12.37 in FY2024.

(3) The stock price estimate is 32% higher than the current market price

We arrive at Adobe’s valuation, using an EPS estimate of around $12.37 and a P/E multiple of just above 49x in fiscal 2024. This translates into a price of $607, which is 32% 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 

[1] Returns as of 6/11/2024
[2] Cumulative total returns since the end of 2016

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