Shares of software giant Adobe (NASDAQ:ADBE) found themselves down slightly in yesterday’s session despite posting solid earnings on Tuesday evening. They’d been trading fairly sideways since the last quarter of 2020 but had been starting to trend down this month as the cyclical rotation from growth to value continues.
From a high level, you’d have thought Tuesday’s report would have been enough to give them a bit of a kick but not so. Revenue was up 26% on the year and well ahead of what analysts were expecting, as was EPS. The muted reaction seen perhaps suggests investors are going to need to see something more than just a solid beat from tech companies in order to justify any future hype.
Management of the $215 billion company will certainly see it a different way. CEO Shantanu Narayen said with the release;
“Adobe drove record Q1 revenue and we are raising our annual targets based on the tremendous opportunity across our business and our continued confidence in our global execution. Adobe’s Creative Cloud, Document Cloud and Experience Cloud have become mission-critical to all customer segments—from students to individuals to large enterprises—across the world.”
Record Quarter
From a financial viewpoint, it was also an impressive report with CFO John Murphy noting that “our execution in the first quarter was strong, driving accelerated revenue growth and earnings. Adobe is unique in its ability to drive both top-line and bottom-line growth with strong cash flows and margins.” Indeed it’s easy to imagine management scratching their heads as to what more they need to do. They posted record revenue numbers and raised their annual targets, something that not many other high flying tech companies can do right now.
A price-to-earnings (P/E) ratio of 39 shouldn’t be considered a red flag either, so it could be that the broader market weakness that we’re seeing this week has been holding shares back. For context, the tech-heavy NASDAQ found itself down 2% yesterday and was under pressure again in early trading today. For investors with cash on the sidelines, it could be worth thinking beyond the current volatility and instead about Adobe’s long-term potential as many of the sell-side heavyweights are doing.
In the aftermath of Tuesday’s report Piper Piper Sandler struck a bullish tone as they praised the company for “capitalizing on improving digital tailwinds in the midst of a global pandemic, especially with the Document Cloud business.” They also see last year’s record numbers setting “a favorable watermark for FY21 earning growth”.
Growth Trajectory
Brian Schwartz from Oppenheimer was of the opinion that the raised targets were still below their true potential, as the company tries to account for potential risk around the coming retirement of their CFO, John Murphy. Even with this in mind though, Schwartz feels
“Adobe stands out from almost any group as the pioneering trailblazer of digital creative and marketing tools and services.The company has transitioned and progressed into a verifiable cloud platform success story as it rides atop multiple product pillars of substantial scale, profits, and growth trajectory.”
Long-term investors shouldn’t really need to hear much more in order to be convinced of the quality of the opportunity before them right now. There’s no doubt that macro factors are playing a large role in Adobe’s shares current lack of energy, but once that dissipates there’s every reason to think they’ll make up for it.