Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Adobe Stumbles Into Another Buy-the-Dip Opportunity

Published 12/15/2023, 03:52 PM
Updated 09/29/2021, 03:25 AM
  • Adobe slips on weaker-than-expected guidance that falls short of consensus by a slim margin
  • Analysts are reaffirming their outlook and see this stock trending higher in 2024
  • A correction in price action is needed after an 80% run-up; this is a buy-the-dip opportunity, but wait for the market to signal when

Adobe's (NASDAQ:ADBE) FQ4 results echoed Oracle's (NYSE:ORCL), causing the shares to fall following the release. The primary cause for the decline is the guidance, which is favorable to shareholder value but slightly less than the analysts expected. The takeaway is that business remains robust, growth will persist, and cash flow is solid, providing ample liquidity to improve the balance sheet and buy back shares.

In this environment, analysts may reset their outlook, but the market should continue to trend higher once it has had a chance to consolidate the substantial gains made in 2023. The stock rose more than 80% for the year and needs a healthy correction to continue trending higher in 2024.

Adobe has a solid quarter, issues soft guidance

Adobe had a solid quarter with revenue of $5.05 billion, growing 11.5% YOY to set a company record for the 2nd year. This is the first quarter of above-$5 billion revenue, and it won’t be the last. Revenue outpaced the consensus estimates by 60 basis points on Digital Media and Digital Experience strength. Digital Media grew by 13%, with Creative Cloud up 12% and led by a 14% gain in Document Cloud. Subscription is the only one to post growth on a revenue stream basis and was offset by slight declines in Products and Services.

The margin news is equally good, with the gross margin holding flat YOY and the operating and net income margins improving. Adjusted operating income came in at $2.34 billion or about 46% of revenue, with the cash flow margin also strong and the GAAP and adjusted earnings growing and outpacing the consensus expectations. GAAP EPS grew by 27% and adjusted 19% to $4.27 or $0.13 better than expected.

The guidance is good but slightly below the analyst consensus and may be cautious given the Fed’s shift in policy. The Fed expects three interest rate cuts next year, which should help stabilize business spending today and lead to increased spending as the year progresses. Additionally, the RPO of $17.22 billion is up 13% YOY, leading revenue and indicating momentum will continue in the current and following quarters.

Regardless, the $5.10 to $5.15 billion in expected Q1 revenue and $17.60 to $18.00 in annual adjusted EPS align with the analysts' expectations and suggest strength in the back half of the year, no reason to close out a position but cause enough for some to trim and take profits.

Adobe repurchases roll on; Shareholder equity rises 17%

Adobe had a fortress balance sheet before Q4, which is stronger now. The company’s revenue leverage and cash flow allowed for an increase in cash, current and total assets while debt and liabilities remain flat. This has debt at 0.12X assets and 0.22X shareholder equity, providing ample financial flexibility and leverage should the need arise. Until then, buybacks are expected to continue at a solid pace. The buybacks in 2023 reduced the share count by more than 2% YOY, and ample funding is available under the current authorization.

The Q4 results and guidance did not spark any analyst upgrades or price target revisions yet, but it was sufficient for several to come out in defense of the stock. The takeaway is that the share price is trending higher but has outrun reality. The analysts are resetting their outlook for the coming year but still rate it at Moderate Buy with a price target of $613. The $613 price target is trending firmly higher but may present a hurdle for the market. It assumes the stock is already trading at fair value, so it may be another quarter or two before another new high is set.

The technical outlook: Adobe reaches the top of the wall

Adobe Stock Price
Adobe price action is trending higher but peaking within the trend. The tech stock could pull back to the $570 level or lower without something to reinvigorate buyers. The critical support is near $520 and may be reached early in 2024.

Original Post

Latest comments

The cloned versions of many of its packages have hit the market. In fact they are better than what Adobe offers.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.