Will Adobe Disappoint Investors on Thursday?

Investors have some big questions ahead of the upcoming earnings update from Adobe (NASDAQ: ADBE). The cloud services specialist announces its operating results on Thursday, June 16, after the market closes.

That report should show whether Adobe is capitalizing on the continued shift toward online creative work. Shareholders will also learn whether challenges like inflation and slowing economic growth threaten management's bullish outlook for 2022.

Let's take a closer look.

The growth update

Adobe entered the Q2 period with solid momentum. Sales rose 17% in Q1, marking just a modest slowdown compared to the 21% increase in the prior quarter. That result edged past investors' expectations and reflected solid demand for its subscription-based software platform. "Our momentum," CFO Dan Durn said in late March, "position[s] us for success in 2022 and beyond."

Yet there were some warning flags in that earnings announcement. Adobe saw slowing growth in its European geography due to the war in Ukraine. Decelerating sales overall pointed to a weaker revenue performance compared to the past few years.

CEO Shantanu Narayen and his team predicted another double-digit sales increase this quarter, but most investors are expecting a second consecutive quarter of decelerating gains. Wall Street pros are looking for sales to land at $4.34 billion, or 13% higher, year over year.

Higher earnings

Adobe isn't immune to rising costs, especially wages. But to date, these pressures haven't hurt its earnings outlook. On the contrary, operating margin held steady at a record 37% of sales last quarter. Cash flow was similarly strong, with operating cash reaching $1.8 billion, or 42% of sales.

ADBE Operating Margin (TTM) Chart

ADBE Operating Margin (TTM) data by YCharts

Look for Adobe to extend these financial gains further into its fiscal year, with help from rising contract values. The company needs to gain new customers while convincing existing clients to sign up for more of its services over time. That growth engine was working well in Q1, and investors are hoping to see it continue working through this quarter.

Looking ahead

Adobe reduced its outlook back in March, but that downgrade was limited to macroeconomic concerns in the European and Asian markets. We'll find out this week whether those issues now extend into its core U.S. segment.

Peers so far haven't signaled any spending pullback on the part of big enterprises. In fact, companies like Zoom are seeing robust demand for services that allow for more flexible work environments.

Adobe should benefit from this same trend, although its consumer business might be the first to show signs of a bigger slowdown. Follow management's commentary to learn if it's seeing a shift from consumers who might be looking for ways to cut costs as inflation spikes.

Even if Adobe lowers its 2022 outlook due to these challenges, the long-term picture seems bright for the business. It has a dominant market share position in several categories that are likely to grow significantly over the next decade. Digital media is everywhere and Adobe's tools are important in its production. And its software-as-a-service model promises to continue churning out industry-leading cash flow that should support a growing product portfolio while funding direct returns to shareholders.

That's why investors shouldn't read too much into what Adobe says about the short-term outlook on Thursday but keep their focus on the bigger picture instead.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe Inc. and Zoom Video Communications. 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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