No Need to Rush and Buy Adobe Dip After Guidance Beatdown
The former cloud king has little reason for hope after the stock was taken out to the woodshed.
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On Wednesday evening, former "cloud king" Adobe ADBE released the firm's fiscal fourth quarter financial results. The results were fine. The guidance was not. The stock was taken out to the woodshed overnight. This is that story. For the three-month period ended November 29, Adobe posted an adjusted EPS of $4.81 (GAAP EPS: $3.79) on revenue of $5.606 billion.
These were both beats of Wall Street's expectations, while the revenue print was good enough for year-over-year growth of 11.1%. This was more or less in line with the pace of Adobe's annual sales growth over the past seven quarters. The lion's share of the adjustment was made for the purpose of stock-based compensation, which in my opinion, should be considered a regular operating expense for mature corporations, but that is not today's fight. Remaining performance obligation (RPO) grew 16% to $19.96 billion.
Operations
As mentioned above, total revenue generation grew 11.1% to $5.606 billion. The cost of that revenue decreased slightly to $616 million from $634 million. This left a gross profit of $4.99 billion (+13.1%), as gross margin improved from 87.4% to 89%. Total GAAP operating expenses increased 13.6% to $3.033 billion, leaving a GAAP operating income of $1.957 billion (+12.3%). After accounting for interest, other income and losses and taxes, GAAP net income stood at $1.683 billion (+13.5%). This works out to $3.79 per fully diluted share versus the year-ago comp of $3.23. Once adjusted, net income grew 8.8% to $2.132 billion. That works out to $4.81 per fully diluted share versus the year ago comp of $4.27.
Segment Sales Performance
- Digital Media generated revenue of $4.15 billion (+12%)
- Document Cloud generated revenue of $843 million (+17%)
- Creative generated revenue of $3.3 billion (+10%)
- Digital Experience generated revenue of $1.4 billion (+10%)
- Subscription generated revenue of $1.27 billion (+13%)
*Note: The Net New Digital Media segment annualized recurring revenue (ARR) was $578 million, bringing segment ARR up to $17.33 billion
Guidance
For the current quarter (FQ1 2025), Adobe is targeting total revenue of $5.63 billion to $5.68 billion. Wall Street had been looking for something close to $5.68 billion, so this is being viewed as a miss. Within that number, Digital Media is seen contributing $4.17 billion to $4.2 billion, while Digital Experience is seen contributing $1.38 billion to $1.4 billion. Earnings per share as projected at $3.85 to $3.90 as reported and $4.95 to $5.00 adjusted. Wall Street had been looking for roughly $4.97 adjusted, which is fine and about $3.91 as reported, which was a miss.
For the full fiscal year 2025, Adobe is targeting total revenue of $23.3 billion to $23.55 billion. Again, Wall Street was looking for $23.55 billion, so this is a fairly significant miss at the midpoint. Earnings per share for the full year are seen at $15.80 to $16.10 as reported and $20.20 to $20.50 adjusted. The street had something more like $20.48 in mind for the adjusted number. Again, at the midpoint, a somewhat significant miss.
Fundamentals
For the reported period, Adobe generated operating cash flow of $2.921 billion. Out of that came just $48 million in capex spending. This left free cash flow of $2.873 billion. Out of that number, Adobe repurchased $2.5 billion in common stock. Adobe does not pay shareholders a cash dividend.
Turning to the balance sheet, Abode ended the quarter with a cash position of $7.886 billion and current assets of $11.232 billion. Current liabilities add up to $10.521 billion including shorter-term debt of $1.499 billion, but also deferred revenue of $6.131 billion, which we know is not a true financial obligation. That leaves the firm's headline current ratio at 1.07 but once adjusted for deferred revenue that ratio rises to a very healthy looking 2.56.
Total assets amount to $30.23 billion, including $13.57 billion in goodwill and other intangibles. At 45% of total assets, that's a bit much for my liking. Total liabilities less equity comes to $16.125 billion. This includes $4.129 billion in longer-term debt. The firm has enough cash on hand to cover its entire debt-load, so this is a strong balance sheet. I don't love the way everything is laid out, but this is a strong balance sheet.
Wall Street
Since these earnings were released last night, I have come across 22 highly-rated (four-plus stars at TipRanks) sell-side analysts who have opined on ADBE. Among those 22 analysts, there are 16 "buy" or buy-equivalent ratings, five "hold" or hold-equivalent ratings and one outright sell rating. Two of our "buys" and one of our "holds" did not set target prices, so we are working with just 19 of those.
After allowing for changes, as there were four analysts that reduced their target prices, the average target across the 19 is $592.74 with a high of $660 (Keith Weiss of Morgan Stanley) and a low of $450 (Jackson Ader of KeyBanc). After omitting those two as potential outliers, the average across the remaining 17 rises to $597.18.
Because you were probably going to ask, the average target price among our "buys" is $614.43, while the average target among our non-buys is an even $532.
My Thoughts
That was some tough guidance. I see why Wall Street is hammering the stock today. That said, this still is a cash flow beast. I don't know if it would hurt anyone if maybe the board decided to perhaps pay their shareholders a little something and cut back on the share repurchases and the stock-based compensation, but then again, who am I? Is artificial intelligence helping or hurting the firm? I honestly don't know.
This chart has its problems. That's for sure. Readers will immediately see the double-top reversal pattern from last summer into autumn. That could have produced a much lower low than it did. The stock had left an unfilled gap to the upside in September and another one this morning as in response to earnings, the attempt to develop a cup pattern was quickly aborted by shareholders. No, Thursday morning's action does not count as the addition of a handle.
By losing the 21-day EMA, 50-day SMA and most importantly the 200-day SMA on Thursday morning, this stock has forced swing traders to liquidate and Portfolio managers to either reduce long-side exposure or exit the name completely. Is there hope?
Yes, there is hope. The low point for the stock from early November, when the shares reversed higher, has to hold going into this weekend. Lose that level ($475) and the stock could easily trade all the way down into the $430s. Hold there, and an eventual run at those lost moving averages might be made. Either way, I see no reason to rush into buying this dip.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
