As with the broader tech sector, Adobe (ADBE) stock has been under pressure, falling 32% over the past six months, compared to the 1% rise in the S&P 500 index. With the stock now down 20% year to date, trailing the 6% drop in the S&P 500 index, investors want to know if can Adobe regain its momentum.
The digital cloud giant giant is set to report first quarter fiscal 2022 earnings results after the closing bell Tuesday. Having successfully transformed its business from selling desktop software into cloud-based subscription services, Adobe is expected to report another solid quarter as the company continues to benefit from the massive secular digitization trend that is poised to remain hot over the next two years. However, as it relates to the stock’s recent decline, the bottom is not yet in, according to Citigroup analyst Tyler Radke who recently lowered the price target from $611 to $455.
Citing increased competition, Radke believes that Adobe’s key Net New annual recurring revenue metric, or nnARR, is likely to see “lower-than-typical upside.” In maintaining his Neutral rating, the analyst believes Adobe is likely to also suffer from slower digital marketing spending, which he says could limit revenue. However, Adobe was defended by Wedbush Securities which picks the company among the list of beaten up stocks that should be owned following last week’s interest rate hike and what is referred to as the Federal Reserve issuing a “bright green light” to investors to buy stocks.
One of the benefits of the company’s transition has been Adobe’s profit margins which has steadily risen during this transition as the subscription business — for both its Digital Media and Digital Experience segments — eliminating the need for periodic software upgrades. While the stock is certainly cheap, the company is facing some tough year-over-year comparisons. How much will that impact expectations? The company on Tuesday must guide confidently to remove any doubt.
For the quarter that ended February, Wall Street expect the San Jose, Calif,-based company to earn $3.34 per share on revenue of $4.24 billion. This compares to the year-ago quarter when earnings came to $3.14 per share on revenue of $3.91 billion. For the full year, ending October, earnings are expected to rise 10.41% year over year to $13.78 per share, while full-year revenue of $17.94 billion would climb 13.6% year over year.
The company’s Digital Media Solutions remains the driving force behind Adobe’s growth trajectory, particularly due to growing adoption of its enterprise services which is bringing in more customers. The pandemic-induced need to work from home has also fueled increased demand for Adobe’s digital products such as its Acrobat document reader and Adobe Sign offerings. Its Creative Cloud segment, which prior to the pandemic was growing at an annualized rate of $7 billion, has also seen a growth acceleration.
Adobe’s Digital Media segment, accounting for more than 70% of its total revenues, remains the dominant moneymaker, helping the company to beat on both the top and bottom line in the fourth quarter. Q4 Digital Media segment revenue came to $3.01 billion, rising 21% year over year. Creative revenue grew 19% year over year to $2.48 billion, while Document Cloud revenue was $532 million, up 29% year over year.
Adobe produced solid growth in each key business segment which topped consensus estimates. This is notable given that the company operates in a crowded software market which included stalwarts Salesforce (CRM) and Oracle (ORCL), among others. As such, now would be a great opportunity to add to an existing position, betting on not only on another top and bottom line beat, but also upside guidance.
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