Adobe (ADBE) stock has declined 42% year to date and 50% over the past 12 months, compared to the 16% year to date decline in the S&P 500 index, which has fallen just 13% in 12 months. Despite the company benefiting from the massive secular digitization trend, the company has been punished amid the recent correction in technology stocks.
But can the company regain its momentum? The digital cloud giant giant is set to report fourth quarter fiscal 2022 earnings results after the closing bell Thursday. Having successfully transformed its business from selling desktop software into cloud-based subscription services, Adobe has executed impressively, reporting strong earnings for the third quarter, including record revenue of $4.43 billion, which beat analyst expectations by more than $6 million.
The company has emerged stronger and more profitable, which are two features that are poised to improve over the next two years as it continues to benefit from strong new user adoption and subscription revenue. However, despite its recent successes, the management team hasn’t gotten the benefit of the doubt. The market has reacted negatively, punishing the stock by more than 16% after the company announced its decision to purchase Figma, a collaborative design platform developer, for $20 billion.
Sparking the selloff in the stock was management saying that it would be in the third year of the deal completion that Figma would to add to the company's earnings. This late stage accretion suggested Adobe's earnings may see a negative impact from the deal for two years. Nevertheless, the stock is cheap at current levels, and now might be an ideal time bet on Adobe's recovery, especially given the company’s free cash flow yield is now close to 4.5%, nearing a five-year high.
For the quarter that ended November, Wall Street expect the San Jose, Calif.-based company to earn $3.50 per share on revenue of $4.53 billion. This compares to the year-ago quarter when earnings came to $3.20 per share on revenue of $4.11 billion. For the full year, earnings are expected to rise 9.2% year over year to $13.63 per share, while full-year revenue of $17.61 billion would climb 11.6% year over year.
Thanks to its diversified software offering, Adobe extracts roughly 90% of its revenue from subscription products, namely its two main operating segments: Digital Media and Digital Experience. The latter segment, accounting for more than 70% of its total revenues, remains the driving force behind Adobe’s growth trajectory, particularly due to growing adoption of its enterprise services which is bringing in more customers.
But slower digital marketing spending which was noticeable in the past two quarters is expected to pressure revenue. In the third quarter, the company beat on both the top and bottom lines, with adjusted EPS rising 11% year over year to $3.40 per share, while Q3 revenue rose 12.66% to $4.43 billion. During the quarter, the Digital Media segment revenue came to $3.23 billion, marking a 13% year-over-year growth. Digital Experience segment revenue was $1.12 billion, representing 14% year-over-year growth.
Creative revenue grew to $2.63 billion, up 11% year over year, while Document Cloud revenue was $607 million, marking a 23% year-over-year growth. Notably, during the quarter, Adobe's net New Digital Media Annualized Recurring Revenue was $449 million, exiting the quarter with Digital Media ARR of $13.4 billion. Creative ARR grew to $11.15 billion, while Document Cloud ARR grew to $2.25 billion. This was a solid quarter all around, despite the downbeat forecast. However, the company on Thursday must guide confidently to remove doubt about its growth potential.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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