1 Red Flag for Adobe in 2022 and 1 Green Flag

Judging by the market's immediate response to Adobe's (NASDAQ: ADBE) third-quarter, fiscal-2023 results, one might surmise that the Photoshop maker's best days are in the rearview mirror. Indeed, the 16% share-price haircut brought loyal stakeholders to the brink after Adobe's investors had already sustained a 34% year-to-date decline.

Interestingly, however, much of the financial press's focus wasn't on Adobe's sales or profits but on the company's just-disclosed plan to purchase an online design start-up. It's a pricey purchase, but another red flag resides in Adobe's fiscal forecast. Both traders and press pundits may have buried the lede as Adobe just closed the book on a fairly decent quarter.

Red flag: Figma's fine, but guidance wasn't in line

From Reuters to The Wall Street Journal, seemingly every major financial-reporting outlet blared a big-font headline about Adobe's in-progress buyout of collaboration-software firm Figma. Time and again, the primary focus was the $20 billion cash-and-stock price tag, while the benefits that Adobe should accrue were little more than an afterthought.

It's Adobe's heftiest acquisition to date, but Figma's value proposition isn't just a figment of Adobe's imagination. Precise revenue-synergy forecasts were elusive on the day of the announcement, but Adobe CEO Shantanu Narayen emphasized concept over numbers, observing, "When you go to engage with a mobile application on the web, somebody has to design that and then translate that into code... That's what Adobe and Figma can do." Moreover, the CEO regards Figma as "the future of work" and envisions "tremendous opportunities" in combining it with Acrobat and other Adobe products.

Fair enough, but there's another concern that prospective investors shouldn't ignore. In particular, Adobe provided upcoming fourth-quarter revenue guidance of approximately $4.52 billion versus the $4.58 billion that analysts on Wall Street had modeled; reasons cited for the lowered forecast include the "overall macroeconomic environment" (probably referring to inflation) and the strengthening dollar. Moreover, Adobe's sales forecast suggests modest sequential growth; but as we'll discuss in a moment, any improvement over Adobe's record Q3 revenue will be an impressive feat.

Green flag: Not a raise but definitely a beat

Has Wall Street become spoiled to the point that every tech titan's quarter has to be a beat-and-raise? Unrealistic expectations may have come into play as Adobe's just-reported quarter exceeded analysts' expectations, yet traders dismissed this and dumped their shares anyway.

Perhaps investors were too distracted by the prospect of Adobe coughing up $20 billion for Figma to notice that Adobe just reported quarterly revenue of $4.43 billion, a company record and up 13% year over year. This result just slightly topped analysts' expectations, but it might help skeptical traders put Adobe's muted current-quarter sales forecast into perspective.

The greenest of green flags, though, is Adobe's Q3, fiscal-year 2023 non-GAAP earnings per share (EPS) of $3.40, which beat the analyst consensus estimate of $3.33 while also demonstrating appreciable improvement over the year-earlier quarter's $3.11. Looking ahead, Adobe projects $3.50 in Q3 non-GAAP EPS, so at least the company's confident enough to bet on a continued earnings growth trajectory.

The takeaway here, then, is that investors should apply their own cost-benefit analyses to the Figma deal while also weighing Adobe's tepid sales guidance against the company's notable earnings beat. In the final analysis, clear-minded traders may decide that the market's knee-jerk response to Adobe's big-ticket Figma buyout was overdone and that the combined business may have enough collaborative-creativity clout in the coming quarters to put Adobe back into financial traders' good graces.

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David Moadel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe Inc. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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