Key points
- Adobe had a solid quarter and outperformed on both a top-line and bottom-line basis, but forecasts were weak.
- Weak guidance means growth close to 10% and wider margins in the second quarter. Acceleration in the rear half is expected.
- Analysts are extremely bullish on this stock, but are scaling back their price targets, lowering the upper end of the range.
- 5 titles we like best from Adobe
Adobe’s NASDAQ: ADBE the solid performance and growth outlook will continue to support price action over time, suggesting a buying opportunity with the post-release dip. The market fell more than 10% in premarket action, not on signs of weakening but because the guidance is in line with market expectations. This has led analysts to reduce targets for the stock and add downward pressure to the stock.
As expected, indications suggest that AI momentum is waning, which is far from the truth. While economic conditions impact business spending, the outlook for AI remains strong. The AI market is expected to grow at a CAGR of 15% in the near future, with cash flow focused on the largest players capable of handling enterprise-level tasks. As the FOMC is expected to cut rates later this year and reinvigorate the economy, investors should expect Adobe’s performance to gain momentum in the second half of the year and surpass cautious guidance.
Did Adobe miss projections for first quarter results?
Adobe Q1 results outperformed on both top and bottom lines; he didn’t miss the screenings. The company produced record net sales of $5.18 billion, with earnings of 11.2% beating the consensus of $0.030 billion. The strength was driven by a 12% increase in digital media and a 10% increase in digital experience. Digital Media results include a net record of new ARR documents, while DIgital Experience saw a 12% increase in subscriptions. RPO, a key business indicator, grew 16% and set a record.
The news on margins is good. The company expanded gross margin and adjusted operating margin and expects margin strength to persist. GAAP results are impacted by a one-time charge related to exiting the Figma deal, but adjusted results are promising. The adjusted $4.48 rose 17.9% year over year and beat the market consensus by a cent.
The exit from the Figma deal is notable for several reasons, including market skepticism and financial health. The company was ready for closing and is now in excellent financial shape, able to sustain and scale up its share repurchase program while maintaining a strong balance sheet. Repurchases in the first quarter totaled 3.1 million shares, reducing the quarter-end comparison by 1.3%. The new authorization is worth $25 billion, or more than 10% of the newly lowered market capitalization.
Guidance is good but not enough to catalyze bullish behavior. The company expects revenue in the range of $5.25 to $5.30 for sequential growth and year-over-year earnings of 9%. The bad news is that analysts had expected a slightly higher result and year-over-year earnings are declining. The good news is that margins are expected to widen, producing EPS in line with consensus. Adobe has a history of outperformance, beating earnings and earnings estimates 100% of the time on a TTM basis.
What do analysts say about Adobe’s guidelines?
Analyst response is lukewarm, with most lowering their price targets following the release. However, sentiment remains firmly bullish, with the stock pegged at Moderate Buy and up 20% from the consensus figure. Analysts are scaling back their targets and lowering the high end of the range, but most of the new revisions are above consensus and continue to lead the market. The highlights of analyst chatter are that price increases will help second-half results, the company is growing its user base and building leverage for future sales, and buybacks are a sign of financial strength.
Adobe shares fell more than 10% to trade near a critical support target. This target is in line with recent lows and a trading range in place since last year. From a technical perspective, the market is at a crucial inflection point that could result in a much deeper rebound or decline. A deeper drop could take the market to $400 or lower, which is unexpected. Assuming the market confirms support at or near current levels, price action would be consistent with a Head and Shoulders pattern. In this scenario, the market would confirm support at the midpoint of a broader trading range, putting targets near $680 and the top of the range in play.
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