Adobe Stock Reaches Turning Point as Market Outlook Resets

Key Points

• Adobe had a solid quarter and outperformed on the top and bottom lines, but guidance was weak. 
• Weak guidance means growth near 10% and broader margins in Q2. An acceleration is expected in the back half. 
• Analysts are overwhelmingly bullish on this stock but are trimming their price targets, lowering the range's top end. 

Adobe’s NASDAQ: ADBE solid performance and outlook for growth will continue to support the price action over time, suggesting a buying opportunity with the post-release dip. The market is down more than 10% in pre-market action, not on signs of weakening but because guidance aligns with the market’s expectations. That led analysts to trim targets for the stock and add downward pressure to the action.

As-expected guidance suggests momentum in AI is waning, which is far from the truth. While economic conditions impact business spending, AI's outlook remains robust. The AI market is projected to grow at a 15% CAGR for the foreseeable future, with cash flow centered on the largest operators able to handle enterprise-level business. Because the FOMC is expected to cut rates later this year and reinvigorate the economy, investors should expect Adobe’s performance to gain momentum in the back half and outperform the cautious guidance. 

Did Adobe Miss Projections for Q1 Results? 

Adobe Q1 results outperformed on the top and bottom lines; it did not miss projections. The company produced a record $5.18 billion in net revenue for a gain of 11.2% that outpaced the consensus by $0.030 billion. The strength was driven by a 12% gain in Digital Media and a 10% increase in Digital Experience. Digital Media results included record net new Document ARR, while DIgital Experience experienced a 12% increase in subscriptions. RPO, a leading indicator of business, is up 16% and setting a record. 

The margin news is good. The company widened the gross margin and adjusted operating margin and expects margin strength to persist. The GAAP results are impacted by a one-time charge related to the Figma-deal exit, but adjusted results are promising. The adjusted $4.48 is up 17.9% YOY and outpaced the Marketbeat consensus by a dime. 

Exiting the Figma deal is noteworthy for several reasons, including market skepticism and financial health. The company was prepped for the closing and is now in excellent financial shape, able to sustain and increase the share repurchase program while maintaining a fortress balance sheet. Repurchases in Q1 amounted to 3.1 million shares, bringing the quarter-end comparison down by 1.3%. The new authorization is worth $25 billion or more than 10% of the newly lowered market cap. 

Guidance is good but not enough to catalyze bullish behavior. The company forecast revenue of $5.25 to $5.30 for sequential growth and a YOY gain of 9%. The bad news is that analysts forecasted slightly more on the top line, and YOY gains are decreasing. The good news is that margins are expected to widen, producing EPS that aligns with the consensus. Adobe has a history of outperformance, beating estimates on the top and bottom line 100% of the time on a TTM basis. 

What do Analysts Say About Adobe’s Guidance? 

The analysts' response is tepid, with most lowering their price targets following the release. However, sentiment remains firmly bullish, with the stock pegged at Moderate Buy and 20% upside at the consensus figure. The analysts are trimming their targets and lowering the range’s high end, but most new revisions are above consensus and continue to lead the market. Takeaways from the analyst chatter are that price increases will aid 2nd half results, the company is growing its user base and building leverage for future sales, and the repurchases are a sign of financial strength. 

Adobe’s shares fell more than 10% to trade near a critical support target. This target aligns with recent lows and a trading range in place since last year. Technical speaking, the market is at a crucial inflection point that could result in a rebound or a much deeper decline. A more profound decline could take the market to $400 or lower, which is unexpected. Assuming the market confirms support at or near the current levels, price action would be consistent with a Head & Shoulders Pattern. In this scenario, the market would confirm support at the mid-point of a larger trading range, bringing targets near $680 and the range top into play.