With a $220.27 billion market cap, Adobe Inc. (ADBE) in San Jose, Calif., is a leading diversified software company. It operates in three segments: Digital Media; Digital Experience; and Publishing and Advertising. The company has an ISS QualityScore of 3, indicating relatively low governance risk.
For its fiscal 2022 first quarter, ended March 4, ADBE’s revenues increased 9% year-over-year to a record $4.26 billion. This can be attributed to a 17% rise in its Document Cloud revenues, a 13% rise in its Digital Experience segment revenues, and a 7% rise in its Creative revenues. Its Operating income came in at $1.58 billion, up 8.7% from the same period last year. In addition, ADBE’s net income and EPS rose marginally year-over-year to $1.27 billion and $2.68, respectively.
However, ADBE’s decelerating growth trajectory and the impact of the Russian-Ukraine war caused investors to turn bearish following ADB’s earnings report release. Also, on March 4, ADBE halted the sale of Adobe products in Russia and Belarus and reduced its digital media annual recurring revenue balance by $75 million in reaction to Russia’s invasion of Ukraine. The company expects a $75 million revenue impact for fiscal 2022 and a total ARR reduction of $87 million due to the sales halt. Shares of ADBE have retreated marginally since the earnings report, which was released on March 23, to close yesterday’s trading session at $466.33. Also, the stock has declined 17.8% in price year-to-date and 19.3% over the past six months.
Click here to check out our Software Industry Report for 2022
Here is what could shape ADBE’s performance in the near term:
Bullish Growth Prospects
Analysts expect ADBE’s revenues to rise 13.3% year-over-year to $4.35 billion in its fiscal year 2022 second quarter (ending May). The $3.31 consensus EPS estimate for the current quarter indicates a 9.3% improvement from the same period last year. In addition, the Street expects ADBE’s revenues and EPS to rise 14.8% and 9.5%, respectively, year-over-year to $4.52 billion and $3.41 in its fiscal third quarter (ending Aug. 31, 2022).
Also, analysts expect the company’s revenues to rise 13.1% year-over-year in fiscal 2022 and 14.9% next year. ADBE’s EPS is expected to increase 9.5% in the current year and 18% in its fiscal 2023.
Frothy Valuation
In terms of forward non-GAAP P/E, ADBE is currently trading at 34.13x, which is 66.9% higher than the 20.45x industry average. Its 2.02 forward non-GAAP PEG multiple is 27.2% higher than the 1.59 industry average.
In addition, the stock’s forward EV/EBITDA and Price/Sales ratios of 24.04 and 12.32, respectively, are significantly higher than the 13.35 and 3.49 industry averages. Also, ADBE is currently trading at 28.23 times its forward cash flows, which is 36.8% higher than the 20.63 industry average.
Consensus Rating and Price Target Indicate Potential Upside
Among the 26 Wall Street analysts that rated ADBE, 21 rated it Buy, while five rated it Hold. The $566.64, 12-month median price target indicates a 21.5% potential upside from yesterday’s closing price of $466.33. The price targets range from a low of $455.00 to a high of $650.00.
POWR Ratings Reflect Uncertainty
ADBE has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
ADBE has a C grade for Stability and Growth. The stock’s relatively high 1.05 beta justifies its Stability grade. Also, the company’s trailing-12-month revenue rose 18% year-over-year. However, its trailing-12-month net income fell 13.3% from the same period last year, in sync with its Growth grade.
Of the 162 stocks in the D-rated Software – Application industry, ADBE is ranked #41.
Beyond what I have stated above, view ADBE ratings for Momentum, Sentiment, Value, and Quality here.
Bottom Line
As one of the largest diversified software companies in the world, ADBE has an immense market share and customer base. As a result, the company’s growth rate is expected to decelerate in the coming years. Also, ADBE’s termination of operations in Russia is expected to have an adverse impact on its annual revenues in 2022. Thus, we think investors should wait until the company’s growth trajectory stabilizes before investing in the stock.
How Does Adobe (ADBE) Stack Up Against its Peers?
While ADBE has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Commvault Systems, Inc. (CVLT), SS&C Technologies Holdings, Inc. (SSNC), and Enghouse Systems Limited (EGHSF), which have an A (Strong Buy) rating.
Click here to check out our Software Industry Report for 2022
ADBE shares were trading at $462.44 per share on Wednesday morning, down $3.89 (-0.83%). Year-to-date, ADBE has declined -18.45%, versus a -2.76% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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