Adobe (“ADBE”) – The Investor Weekly Stock Report

Summary – Is Adobe a good investment?

Adobe fell yesterday after the software giant forecasted weaker-than-expected results for Q2.

The low Q1 Digital Media upside is largely explained by a war-related slowdown in EMEA.

As a result, Morgan Stanley analyst, Keith Weiss, lowered his price target to $591 from $652.

“While the [first quarter] print provided some evidence of that stabilization – a modest beat to revenue (+1% vs guidance) and net new Digital Media Annual Recurring Revenue of $418 million coming in +4% ahead of consensus (in line with low/mid-single digit buyside bogey) – impacts of the Russia-Ukraine conflict, a potentially weakening spending environment in Europe and a remarkably unclear conversation on the full year outlook likely leave investors with further questions on the underlying trends in the Digital Media business,” Weiss wrote in a note to clients.

We remain bullish on Adobe. Now is an excellent time to build a long-term position in the stock.

Q1 Results

For the first quarter, ended March 4, Adobe earned $3.37 per share on $4.26 billion in sales. A consensus of Wall Street estimates expected the company to earn $3.34 per share on $4.24 billion in revenues. The figure improved 7.3% on a year-over-year basis and 5.3% sequentially.

BOA analyst Brad Sills reiterated a buy rating, but lowered the price target to $560 from $640, citing lower earnings multiple.

Top-line growth was driven by the strong performance of Adobe Creative Cloud, Document Cloud and Experience Cloud. Accelerating subscription revenues further benefited the results.

The gross margin was 87.9%, which contracted 70 basis points on a year-over-year basis. Adobe had operating expenses of $2.2 billion, reflecting an 8.3% year-over-year increase. As a percentage of total revenues, the figure shrunk 40 basis points to 50.9%.

The adjusted operating margin was 46.8%, flat year over year.

Cash generated from operations was $1.8 billion in the fiscal first quarter versus $2.05 billion in the fiscal fourth quarter. In the reported quarter, the company repurchased 3.8 million shares.

Why the big price drop this week?

Shares are down more than 10% today. The first quarter results showed stabilization of the Digital Media business. Management indicated that margins may contract in the coming quarter. Additionally, weak spending in Europe points to additional softness.

Revenue and Earnings

Adobe’s financial results demonstrate the company’s ability to execute in a challenging macroeconomic and geopolitical climate. The company continues to attract new customers, signing up transformational deals, growing a recurring book of business and seeing emerging businesses continue to evolve.

 Adobe is focused on digitization. Adobe’s products offer customers access to a digital future, underpinning how they live and work. The company’s investment in products, marketing and a data-driven operating model are continuing to drive Adobe’s growth.

Top Line and Segment Details

Revenue comes from three categories:
1. Subscription
2. Product
3. Services & Support

Subscription revenues were $3.9 billion (accounting for 93% of its total revenues), up 10% on a year-over-year basis.

Product revenues totaled $145 million (3% of revenues), down 6% year over year.

Services & Support revenues were $159 million (4% of revenues), declining 4% from the prior-year quarter.

And the company operates several key segments: Digital Media and Digital Experience.

Digital Media: The segment generated revenues of $3.1 billion, which improved 9% on a year-over-year basis. The segment comprises Creative Cloud and Document Cloud. The segment’s annualized recurring revenues (ARR) increased to $12.5 billion.

Creative Cloud generated $2.5 billion of revenues, up 7% year over year. Creative ARR was $10.5 billion. There exists growing demand for Creative Cloud products globally. The number of monthly active users on Creative Cloud Express continues to increase. Additional tailwinds included Substance 3D and new 3D Modeler beta, owing to the rising proliferation of Metaverse. Document Cloud’s revenues were $562 million, up 17% from the prior-year quarter. Document ARR was $2 billion. The spike in the searches for document actions benefited Acrobat Web. Adobe Sign continues to show success, owing to the new sign integration with Adobe Commerce and Workfront and the signature feature in Acrobat. Strong momentum in Acrobat PDFs on mobile was also a credit positive.

Digital Experience: The segment comprises Adobe Experience Cloud. The segment generated revenues of $1.1 billion, up 13% on a year-over-year basis. Experience Cloud subscription revenues were $932 million, which rose 15% sequentially.

Cross cloud integrations, product innovations and the growing adoption of Adobe Experience Manager continue to drive revenue forward.

Earnings Guidance

The company expects to earn $3.30 per share on $4.34 billion in revenue. Analysts were expecting the company to earn $3.35 per share and $4.4 billion in sales.

What does Adobe need to do to regain momentum?

1. Grow net recurring revenue from its Digital Media business.
2. Accelerate the growth and adoption of its Digital Experience business.

Valuation

Conclusion: Adobe makes an excellent long-term investment

As numerous global businesses, which aligns well with Adobe’s digital experience business. Adobe has continuously announced new additions to its most popular platforms, including critical developments that expand its business into new, lucrative markets.

Creative Cloud is catalyzing a variety of trends, enabling customers of to create innovative quality content. The company continues to lead in core creative categories such as imaging, design, video and illustration. And it continues advancing new media types like 3D and immersive for the emerging metaverse platforms. Creative Cloud Express is the company’s new template driven web and mobile product.

On the video front, demand for video continues to grow unabated. In Q1, Adobe launched new AI-powered innovations in Premiere Pro that help merge music into video sequences and accelerate transcriptions. The company drove strong growth for Frame.io, the leading video collaboration solution Adobe acquired late last year. Frame had its best quarter ever, closing more deals than in any prior quarter while increasing deal sizes to record levels. On the Document Cloud side, digital documents have become the foundation of how businesses run and will continue to gain significance as hybrid work grows. Adobe is accelerating document productivity with Document Cloud, enabling all capabilities, including editing, converting, sharing, scanning and signing to be frictionless across web, desktop and mobile.

Disclosure
I am/we are long ADBE either through stock ownership, options, or other derivatives. 

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.