As with the broader tech sector, Adobe (ADBE) stock has been under heavy selling pressure, falling 43% over the past six months, compared to the 20% decline in the S&P 500 index. With the stock now down 34% year to date, and falling 31% over the past twelve months, investors want to know if Adobe can regain its momentum.
The digital cloud giant giant is set to report second quarter fiscal 2022 earnings results after the closing bell Thursday. Having successfully transformed its business from selling desktop software into cloud-based subscription services, Adobe has emerged stronger and more profitable, benefiting from the massive secular digitization trend that is poised to remain a driving force for revenue over the next several years. But the company can’t escape the massive correction that has hit the overall market, and in particular, tech stocks.
Notably, this is despite the company’s strong execution, evidenced by a 31% jump in Q1 revenue for the Creative Cloud segment and a 24% surge in the Digital Experience, driven by strong new user adoption and subscription revenue. Investors have nonetheless become concerned about growth deceleration. The year-over-year rate of consolidate revenue growth in Q1 dropped sharply to 9% – the lowest growth rate since 2018.
Adobe’s flat year-over-year earnings per share growth was also a surprise. Management also spooked investors due to weak guidance; they are being cautious due to slower digital marketing spending, which could limit revenue. But the stock is cheap; currently trading around $370, the shares have fallen near 50% since reaching their all-time high of $700 last November. Meanwhile, Adobe’s free cash flow yield is now close to 4.5% near a five-year high. Can the stock recover from here?
For the quarter that ended May, Wall Street expect the San Jose, Calif,-based company to earn $3.31 per share on revenue of $4.34 billion. This compares to the year-ago quarter when earnings came to $3.03 per share on revenue of $3.84 billion. For the full year, ending October, earnings are expected to rise 9.45% year over year to $13.66 per share, while full-year revenue of $17.85 billion would climb 13.1% year over year.
One of the benefits of the company’s transition has been Adobe’s profit margins, which have steadily risen as the subscription business in both its Digital Media and Digital Experience segments have grown. The latter segment, accounting for more than 70% of its total revenues, remains the driving force behind Adobe’s growth trajectory, particularly due to growing adoption of its enterprise services which is bringing in more customers. Its Creative Cloud segment, which prior to the pandemic was growing at an annualized rate of $7 billion, has also seen a growth acceleration.
However, as noted, both segments have begun to slow. In the first quarter, the company to beat on both the top and bottom lines, reporting revenue of $4.26 billion which beat estimates by $20 million, while adjusted EPS of $3.37 topped consensus of $3.34. As it has done in recent quarter, Adobe produced solid growth in each key business segment, despite competition from rivals like Salesforce (CRM) and Oracle (ORCL), among others.
However, the company guided for the second quarter to see $4.34 billion in revenues, marking a 13% year over year growth, while adjusted EPS is expected to grow by 9% year over year — both would mark meaningful growth deceleration on a year-over-year basis. Adobe is facing tough year-over-year comparisons. The company on Thursday must nonetheless guide confidently to remove doubt about its growth potential.
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