Adobe Still Looking for a Bottom

Shares of Adobe (ADBE) tumbled to a 2-1/2 year low today and continue to struggle.  Adobe is down -45% this year compared to a -26% decline in the Nasdaq 100 Stock Index ($IUXX) (QQQ).  Today’s decline was sparked by concern about earnings and after it shelled out $20 billion to buy software company Figma, the biggest-ever takeover of a private software company.

Mizuho Securities and BMO Capital Markets downgraded Adobe this week, and Citigroup today cut its Q4 earnings estimates for Adobe.  Adobe today reported Q3 revenue of $4.43 billion, right on expectations, but forecast Q4 revenue of $4.52 billion, below the consensus of $4.59 billion.  In addition, Adobe has been hampered by a rally in the dollar to a 20-year high and soaring interest rates, representing headwinds for overseas sales and stock multiples.

With a market value of $174 billion, Adobe has long been a favorite pick for investors.  Over the past two decades, it has returned +20% a year, about double the return of the S&P 500 Index ($SPX) (SPY).  Also, most analysts still see growth in the stock, with double-digit revenue increases anticipated for the next several years.  However, BMO Capital Markets cites “uncertainty about the durability of growth” for Adobe’s Creative Cloud business, which accounted for more than 60% of Adobe’s 2021 revenue.

Future revenue growth for Adobe may be curtailed as the Fed’s interest rate hikes threaten to push the economy into recession, weighing on demand and resulting in longer times for clients to sign deals.  After Adobe cut its annual revenue forecast in mid-June, Morgan Stanley downgraded the stock to equal weight on expectations of a slowing structural growth profile.  Today’s earnings report added to those concerns after Adobe forecasted weaker-than-expected Q4 revenue. 

The recent weakness in Adobe’s stock has made it look like more of a bargain on some metrics.  Adobe’s valuation has fallen considerably and trades around 24 times forward earnings, near its cheapest since late 2012 and below its 10-year average of 33.  The CEO of 50 Park Investments said he sees more volatility ahead for Adobe, but “the stars are beginning to align for value investors.”

• Tech Stock Weakness Weighs on the Overall Market
• This Small Cap Furniture Stock Deserves More LOVE From Investors
• Stocks Slip as Strong U.S. Economic News Pushes Bond Yields Higher
• Stocks Mixed As Fed Rate Hike Looms