Should you buy the dip in this software giant?

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Diversified software company Adobe Inc. (ADBE) operates through three segments: Digital Media; Digital experience; and publishing and advertising. The company serves professionals, marketers, content creators, application developers, consumers, enterprises, advertisers, merchants, web analysts and data scientists.

ADBE posted strong financial results for the second quarter. The company achieved record revenue in the quarter, driven by strong demand on Creative Cloud, Document Cloud and Experience Cloud. It reported more than $2 billion in operating cash flow, demonstrating its growing revenue streams and financial discipline.

“Our operating model continues to fuel consistent growth, enabling the company to invest in cutting-edge cloud solutions and emerging innovations that are gaining market traction,” said Dan Durn, executive vice president. and Chief Financial Officer of ADBE.

In June, ADBE unveiled innovations for its customer data platform (CDP), Adobe Real-Time CDP, to help global brands transition from third-party cookies to first-party data. To accelerate the first-party data strategy, Adobe introduced enriched customer profiles with commerce, AI-based targeting, new privacy tools, and segment matching across all channels.

In the same month, ADBE announced significant updates to Adobe Substance 3D, a suite of tools and services supporting 3D content creation. Updates include a 3D Materials SDK for developers, powerful new plug-ins, and native support for Apple M-series chips for Painter, Designer, and Sampler. Substance 3D apps demonstrate strong demand by exceeding 100% year-over-year growth.

Despite strong financials and bright growth prospects, ADBE is expected to face several macroeconomic and geopolitical headwinds in the coming months, including the impact of the ongoing war in Russia and Ukraine and the company’s decision to ceasing all new sales in Russia and Belarus, increasing effective tax rates and an additional $175 million headwind to third and fourth quarter revenue.

Shares of ADBE are down 22.2% year-to-date and 30% over the past year to close the latest trading session at $439.03. The stock is currently trading 37.2% below its 52-week high of $699.54, which it reached on November 22, 2021.

Here’s what could influence ADBE’s performance in the coming months:

Strong finances

ADBE’s revenue increased 14.4% year-over-year to $4.39 billion, and its gross profit increased 13.5% year-over-year to $3.85 billion in the second quarter of fiscal 2022 ended June 3, 2022. The company’s non-GAAP operating income was $1.97 billion, up 12 % year over year.

Additionally, the company’s non-GAAP net income and net earnings per share were $1.59 billion and $3.35, recording increases of 8.9% and 10.6% from to the previous year period, respectively.

Favorable analyst estimates

Analysts expect ADBE’s revenue for the third quarter of fiscal 2022 (ending August 2022) to be $4.44 billion, an increase of 12.9% over the same period in 2021. The consensus EPS estimate of $3.35 for the current quarter points to a 7.6% year-over-year. year increase. The company has exceeded consensus revenue and EPS estimates in each of the past four quarters.

Additionally, ADBE’s revenue and EPS for fiscal 2022 (ending November 2022) are expected to increase 12% and 8.5% year-over-year, respectively. Additionally, analysts expect the company’s revenue and EPS for next year to grow 14% and 17.6% year-over-year, respectively.

Extended valuation

In non-GAAP forward P/E terms, ADBE is currently trading at 32.42x, 67.8% higher than the industry average of 19.32x. The stock’s EV/Forward multiple of 11.58 is 279.4% higher than the industry average of 3.05. Additionally, its forward EV/EBITDA and price/sales ratios of 23.31 and 11.62 compared to industry averages of 13.22 and 3.00, respectively.

Additionally, in terms of futures price/cash flow, ADBE is currently trading at 26.64x, 38.7% higher than the industry average of 19.21x.

High profitability

ADBE’s last 12 months Gross margin of 87.87% is 74.6% higher than the industry average of 50.33%. Its 12-month EBITDA margin of 39.91% is 205.9% higher than the industry average of 13.05%. Similarly, the stock’s trailing 12-month net income margin of 29.29% compares to the industry average of 4.25%.

Additionally, ADBE’s 12-month ROCE, ROTC and ROTA of 35.13%, 20.34% and 18.57% are above industry averages of 7.28%, 3.96% and 2.74%, respectively.

POWR ratings don’t indicate enough advantage

ADBE has an overall rating of C, which translates to Neutral in our own POWR Rankings system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

ADBE has an A rating for quality, in line with its industry-leading earnings multiples. Additionally, ADBE has a D rating for Momentum. This is warranted as the stock is currently trading below its 200-day moving average of $477.26.

Additionally, ADBE has a C rating for Stability. The stock’s beta of 1.39 justifies the Stability rating.

Of the 154 shares of Software app industry, ADBE is ranked #33.

Beyond what I said above, we also assigned ADBE ratings for Sentiment, Growth and Value. Access all ADBE ratings here.

Conclusion

Despite the release of promising quarterly results, investors have been bearish on ADBE, due to its exorbitant valuation and relatively low stability. Additionally, the company is expected to remain under pressure in the coming months due to various macroeconomic and geopolitical headwinds. Thus, investors should wait for a better entry point into the stock.

Comment Adobe Inc. (ADBE) Up to his peers?

Although ADBE has a C rating in our proprietary rating system, one might consider looking at its industry peers, IBEX Ltd. (IBEX), American Software, Inc. (AMSWA) and Progress Software Corporation (PRGS), which have an A (Strong Buy) rating.


ADBE shares were trading at $425.97 per share on Friday afternoon, down $13.06 (-2.97%). Year-to-date, ADBE is down -24.88%, compared to a -10.31% rise in the benchmark S&P 500 over the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using its fundamental approach to stock analysis, Mangeet seeks to help retail investors understand the underlying factors before making investment decisions. After…

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