Adobe Stock Down 3% Today – Time to Buy ADBE Stock?

The price of Adobe stock is dropping 3% this morning in pre-market stock trading action after the company released its financial results covering the first quarter of the 2021 fiscal year as guidance for the next quarter fell short of analysts’ expectations.

During the first quarter ended on 4 March, the company reported total revenues of $4.26 billion resulting in a 9.2% year-on-year jump primarily led by higher subscription revenues. The consensus forecast for the period as per Capital IQ stood at $4.24 billion.

Digital Experience sales advanced the most as they grew 13.2% compared to the first quarter of the 2021 fiscal year at $1.06 billion while Digital Media sales went up 8.8% at $3.11 billion. The contribution of these two segments to the firm’s top-line results remained relatively unchanged at 25% and 73% respectively.

GAAP and non-GAAP operating income for the quarter stood at $1.58 billion and $1.99 billion resulting in an 8.7% and 9% year-on-year jump respectively while adjusted earnings per share advanced 23 cents to $3.37. The consensus estimate for the company’s adjusted EPS for this quarter stood at $3.34.

The management took the opportunity to update investors about the impact that its decision to stop selling its products in Russia and Belarus would have on its financial performance. According to its estimates, the company will see its revenues reduced by around $75 million while its annual recurring revenues are expected to take an $87 million hit.

For the upcoming second quarter of the 2022 fiscal year, the company expects to report total revenues of $4.34 billion along with adjusted earnings per share of $3.30. Both figures were slightly lower than analysts’ estimates for the period.

According to the earnings call that followed the release of these results, Adobe’s management stated that they are planning to increase the price of certain products and services by the end of the second quarter.

The combination of weaker-than-expected guidance and the fact that the war between Russia and Ukraine is materially impacting the firm’s top-line results could be the reason why Adobe stock is dropping today.

What could be expected from this tech stock after this earnings report? In this article, I’ll be assessing the price action and fundamentals of Adobe stock to outline plausible scenarios for the future.

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Adobe Stock – Technical Analysis

ADBE has been on a sharp downtrend since November 2021 as equities within the tech sector were pummeled by a climb in US Treasury yields.

The market has adopted a more cautious approach toward risky assets as the macroeconomic landscape in the United States is shifting. In this regard, the Federal Reserve just approved a 25 basis points interest rate hike a few days ago and said that it will be raising rates in the next 6 FOMC meetings.

Thus far, Adobe is accumulating a 17.7% loss in 2022 while the stock is trading 33.3% below its 52-week high. Moreover, the price remains 20% below its 200-day simple moving average.

All of these negative percentages reflect the strength of the negative momentum that ADBE stock has experienced lately. However, the latest price action could possibly be signaling a short-term trend reversal.

In this regard, the price just broke the falling wedge formation shown in the chart above. This move was accompanied by elevated trading volumes. The price of ADBE is accumulating a 6-day winning streak which means that this post-earnings decline might just be a temporary breather.

Momentum indicators are favoring a positive outlook as the Relative Strength Index (RSI) has climbed to 53 (bullish) while the MACD just moved above the signal line and is being accompanied by steadily increasing positive momentum readings.

Since Adobe’s projections were in line with those of the market, there are no immediate negative catalysts at the moment that could further depress the valuation of this tech giant.

That said, any negative developments in Europe concerning the Russia-Ukraine war could materially affect the business if the conflict escalates and other countries within the region start to get actively involved.

Adobe Stock – Fundamental Analysis

Adobe’s revenues have been growing at a rapid pace in the past few years and, at the same time, the company’s top and bottom-line profit margins have also been improving.

By the end of the 2021 fiscal year, Adobe’s GAAP operating margin stood at 36.8% while its net margin was 30%.

In 2022, analysts are expecting to see the firm’s revenues increasing by 13.6% while its adjusted earnings per share are expected to land at $13.78 or 10.4% higher than the previous year. Based on that estimate, the firm is trading at a forward P/E ratio of 32.8x.

Meanwhile, the company produced free cash flows of $6.88 billion resulting in an FCF margin of 43.6%. If we assume that Adobe will maintain a 40% FCF margin in 2022 the company would be valued at 30.8 times its forecasted free cash flows.

The company has a long-term debt of $3.63 billion on total assets of $26 billion including $2.74 billion in cash and equivalents and $1.96 billion in short-term investments.

Based on these multiples, the firm’s robust balance sheet, and its strong profit and cash-flow generation capacity, Adobe stock seems to be fairly valued at the moment.

That said, since the macroeconomic environment is changing rapidly, nothing would prevent the firm’s valuation from declining as market participants may start to demand a higher risk premium.

With this in mind, the downside risk for Adobe seems higher at the moment than its upside potential if interest rates keep increasing in response to persistent inflationary pressures.

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