Adobe falls after earnings, is it time to Buy?
Investors had been much anticipating Adobes ADBE earnings as the Computer – Software Industry giant is also one of the most revered tech stocks.
Despite an earnings beat, the stock was down 17% immediately following the release. This poses the question, is it time to buy?
Let’s take a closer look at ADBE’s third quarter earnings and valuation to see if it is indeed time to buy the stock.
Q3 Earnings: In its latest quarterly report, Adobe had earnings of $3.40 a share, posting an earnings surprise of 2%. Revenue came in at $3.23 billion, which represented 13% year over year growth. Growth in Adobe’s document cloud stuck out, with revenue up 23% year over year at $607 million.
CEO Shantanu Narayen stated Adobe’s groundbreaking technology and track record of creating and leading categories and consistent execution fueled another record quarter.
Guidance: Sales guidance is down for the fourth quarter at $4.52 billion compared to the Zacks estimate of $4.57 billion. The lower revenue guidance caused ADBE to selloff following its third quarter earnings release. Since the Adobe release, we saw FedEx FDX shares take an even bigger hit after it pre-announced and guided lower.
Adobe’s acquisition of design software firm Figma escalated the selloff. Investors turned sour to the deal as Figma is thought to be valued at $10 billion, far less than the $20 billion Adobe paid in cash and stock.
Adobe does however expect Q4 earnings to be up to $3.50 compared to the Zacks estimate of $3.44 a share.
Performance
Year to date, ADBE is now down 48% after its latest drop. ADBE is also 58% off its 52-week highs seen last November. At current levels, ADBE has a forward P/E of 22.9X. This is near the industry average of 23.6X. ADBE’s forward P/E is much lower than its 5-year high of 66.3X and below the median of 45.2X.
Image Source: Zacks Investment Research
We can also see from the chart above that Adobe’s TTM P/E is now at its lowest point over the last five years.
Bottom Line
Adobe’s weak guidance suggests that earnings estimates for the coming periods will remain under pressure. Please note that the revisions trend was already negative before the quarterly release, with estimates for this year and next coming down.
Although ADBE looks compelling trading at 22.9X forward 12-month earnings, it makes sense to be cautious about the stock given its near-term profitability challenges. It is these profitability challenges that are driving the current Zacks Rank # 4 (Sell), suggesting further downside risks.
The broader market environment will keep investors and consumers cautious. This is especially true for technology stocks, as investors and consumers alike tend to stay away from technology amidst high inflation concerns.
Adobe was already dealing with decelerating growth and the weak revenue guidance for Q4 feeds into that negative narrative. On top of that, it appears Adobe may have overpaid for the acquisition of Figma.
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