Adobe Stock Gained 14% In A Day, What’s Next?

Adobe’s stock (NASDAQ: ADBE) price jumped 14.5% on 14th June, as compared to a near-zero change in the S&P500 index. In sharp contrast, Adobe’s peer Salesforce (NYSE: CRM) was up 1% over the same period. The rise in ADBE stock price came after the company declared second quarter FY2024 (Dec-Nov) results. It outperformed both the street estimates and the financial guidance provided by the company. Overall, ADBE stock is currently trading around $525, which is 13% below its fair value of $601 – 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 $525 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?

The company posted total revenues of $5.31 billion – up 10% y-o-y, in the second quarter of FY2024 (Q2 FY’24 refers to the quarter that ended on May 31, 2024). It was driven by an 11% rise in the digital media and a 9% increase in the digital experience segments. Notably, the digital media unit benefited from a 10% gain in the creative cloud and a 19% improvement in the creative cloud categories. Further, the digital Media ARR (Annualized Recurring Revenue) increased 13% y-o-y to $16.25 billion. On the cost front, total expenses as a % of revenues witnessed a favorable drop, leading to an operating margin of 35.5% vs 33.7%. Altogether, the net income rose by 21% y-o-y to $1.57 billion.

The top line grew 11% y-o-y to $10.5 billion in the first two quarters of FY 2024. It was mainly because of a 12% gain in digital media revenues, which benefited from growth in both the creative cloud and document cloud sub-segments. On the expense side, the operating margin declined from 33.9% to 26.6% over the same period, due to a $1 billion acquisition termination fee incurred in Q1. All in all, the net income decreased 14% y-o-y to $2.2 billion.

Moving forward, ADBE expects the third quarter (FY2024) revenues and earnings to remain between $5.33-$5.38 billion and $3.45-$3.50 (GAAP) respectively. Overall, Adobe’s revenues are estimated to touch $21.43 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 $5.57 billion and an annual GAAP EPS of $12.38. This coupled with a P/E multiple of just below 49x will lead to a valuation of $601.

[1] Returns as of 6/17/2024
[2] Cumulative total returns since the end of 2016

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