Digital media and marketing software firm Adobe Inc. (ADBE) reported its second-quarter results on Thursday, June 13. The company modestly surpassed the analyst’s estimates driven by advancements across its core product offerings: Creative Cloud, Document Cloud, and Experience Cloud. As investors cheered its promising outlook, the stock jumped 17% in extended trading.

In the fiscal first quarter (ended on May 31, 2024), ADBE reported a total revenue of $5.31 billion, reflecting a 10.2% year-over-year increase. The net new annualized recurring revenue for the Digital Media business, including Creative Cloud subscriptions, came in at $487 million.

The company’s gross profit grew 11% from the year-ago value to $4.71 billion, while its non-GAAP operating income rose 11.9% from the prior-year quarter to $2.44 billion. In addition, ADBE’s non-GAAP net income and non-GAAP EPS came in at $2.02 billion and $4.48, representing increases of 12.8% and 14.6% year-over-year, respectively.

On top of it, the company steadily surpassed Wall Street’s EPS and revenue estimates. ADBE’s earnings per share was 1.9% above the consensus estimate, and its revenue exceeded the analysts’ estimates by $15.67 million. It is no surprise that ADBE’s strong earnings have topped the EPS estimates in each of the past consecutive four quarters.

Shantanu Narayen, ADBE’s chair and CEO, attributed the success to ADBE’s unique approach to AI and innovative product delivery, which continue to attract new customers and provide more value to existing ones.

In light of this performance, management has boosted its full-year guidance. The company now expects adjusted earnings per share for the 2024 fiscal year to be between $18.00 and $18.20, with revenue projected to range from $21.40 billion to $21.50 billion.

AI’s Impact on Adobe

ADBE is strategically integrating Artificial Intelligence (AI) like the Acrobat AI Assistant and Adobe Express to drive innovation and productivity. While concerns persist about AI potentially automating tasks traditionally handled by Adobe’s flagship applications, such as Photoshop and Premiere, the company’s proactive approach aims to leverage AI to augment rather than replace human creativity.

Favorable Analyst Estimates

Analysts expect ADBE’s revenue for the fiscal third quarter (ending August 2024) to increase 9.9% year-over-year to $5.37 billion. Its EPS for the current quarter is forecasted to register a 10.6% year-over-year growth, settling at $4.53. Furthermore, the company topped the consensus EPS estimates in each of the trailing four quarters, which is excellent.

For the fiscal year ending November 2024, the company’s EPS is anticipated to grow 13% year-over-year to $18.16, while its revenue is expected to increase 10.6% from the prior year period to $21.47 billion.

Mixed Valuation

In terms of forward non-GAAP PEG, ADBE is trading at 1.49x, which is 26.1% lower than the industry average of 2.02x. Also, its 20.60x forward EV/EBIT ratio stands marginally below the 20.78x industry average.

On the other hand, its forward non-GAAP P/E multiple of 25.46 is 6.5% higher than the industry average of 23.90x. Likewise, its forward EV/EBITDA ratio of 18.97x exceeds the industry norm by 29.3%, and its 9.58x forward Price/Sales is 227.3% higher than the industry average of 2.93x.

High Profitability

ADBE’s 88.08% trailing-12-month gross profit margin is 77.9% higher than the 49.52% industry average. The stock’s trailing-12-month EBITDA margin of 38.07% is 296.5% higher than the 9.60% industry average.

Moreover, the stock’s 24.08% trailing-12-month net income margin exceeds the industry average of 2.88% by 735.6%. Similarly, its trailing-12-month ROCE, ROTC, and ROTA of 32.37%, 23%, and 16.70% compares favorably with the respective industry averages of 4.17%, 2.75%, and 1.66%.

POWR Ratings Exhibit Mixed Prospects

ADBE’s stance is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade in Quality, which aligns with its high profitability metrics.

However, with a five-year beta of 1.27, the stock has earned a grade C for Stability. Also, the stock is trading below its 100-day moving average of $519.28 but above its 10-day moving average of $455.28, justifying its C grade for Momentum.

The stock is ranked #48 out of 134 stocks in the Software – Application industry. Click here to access ADBE’s Growth, Value, and Sentiment ratings.

Bottom Line

As Adobe outlines its fiscal 2024 guidance in line with analysts’ expectations, investors are cautiously optimistic following a slight beat in the second-quarter earnings. Having been a public company for nearly four decades, the marginal nature of ADBE’s revenue beats raises questions about its growth trajectory. Also, the reported $5.31 billion in revenue versus an expected $5.30 billion for the second quarter underscores tempered growth expectations.

Investors are now weighing whether Adobe can sustain its current low double-digit growth rates over the long term amid challenges posed by advancing AI technologies. Despite an 8.7% surge in price performance over the past month, ADBE has declined 11.9% year-to-date, closing the last trading session at $525.31.

Given this backdrop, it could be wise for the investors to wait for a more favorable entry point.

How Does Adobe Inc. (ADBE) Stack Up Against Its Peers?

While ADBE has an overall grade of C, equating to a Neutral rating, you may also check out these A (Strong Buy) rated stocks within the Software – Application industry: Yalla Group Limited (YALA), TeamViewer SE (TMVWY) and SS&C Technologies Holdings, Inc. (SSNC). For exploring more A-rated Software – Application stocks, click here.

What To Do Next?

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ADBE shares closed at $525.31 on Friday, up $66.57 (+14.51%). Year-to-date, ADBE has declined -11.95%, versus a 14.55% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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