Cracks Form In Adobe’s Growth Outlook

It’s Not A Good Time To Buy Adobe 

The 27 analysts covering Adobe (NASDAQ: ADBE) still rate it a solid Buy but we don't think now is the time to start buying. While the Buy rating has held firm over the last year the Marketbeat.com consensus price target is slipping. Details within the Q2 earnings report suggests growth is peaking and guidance, which was lowered, may be lowered again later in the year. In the eyes of Citigroup analysts Tyler Radke, the guidance is “controversial” and contrary to their idea of “greater growth” in the coming quarters. 

As it stands now, at least 16 of those 27 analysts have come out with commentary and all but one lowered their price targets. The sole outlier is a newly initiated coverage with a Buy rating but a price target of only $420. That target is just above the Marketbeat.com low price target and well below the consensus of $495. The consensus, FYI, is trending lower and down sharply in the 12-month, 3-month, and 1-month comparisons and heading lower. 

The institutional activity poses a threat to share prices as well. Although the net of activity over the past year has been very bullish the trends are changing. Institutional buying hit a peak in Q1 and has slacked off in Q2 (although it is still strong) while institutional selling is accelerating. The net of activity in Q2 is bullish but only slightly so and that balance could easily tip in favor of the bears now the Q2 earnings report is in the bag. In that scenario, the downtrend in price action is likely to continue. 

Adobe Has Ok Quarter, Guides Weak 

Adobe had an OK quarter but the deceleration in YOY growth and weak guidance suggests a peak in growth was hit and the slowdown could accelerate. The $4.39 billion in revenue is up 14% from last year and beat the consensus by 90 basis points but the beat is very slim and the growth is down 800 basis points on a YOY basis. On a segment basis, Digital Media Services grew by 15% while Creative grew by 12%, Document Cloud by 27%, and Digitial Experience Subscription by 18%. All segments were impacted by the exit from Russia but no color was given on that. 

Moving on to the margin and earnings, the news is equally lackluster in regard to the analyst's expectations. The company’s margin contracted at both the gross and operating level to come in close to the consensus target which is no catalyst for a rally. On the bottom line, the adjusted $3.35 beat the consensus by 120 bps compared to the 90 bps top-line outperformance, which is good, but adjusted EPS only grew 10.9% YOY compared to the 14% in revenue growth.

Turning to the guidance, the news is just as mixed. The company is expecting growth but lowered the targets for Q3 and FY revenue and earnings to a level below the Marketbeat.com consensus. There is a chance the company will experience a bottom in Q3 that leads to Q4 strength but that is a gamble we’re not willing to take at this time. In our view, if Q3 is a bottom for the company, we’ll get a much better entry signal from the market than what we’ve seen so far. 

The Technical Outlook: Adobe Hit A Bottom, But

Price action in Adobe fell hard in the wake of the Q2 report but may have hit a bottom. The price action bounced from the new low and closed well above the low of the day but is still below the most recent support level. This level is near $371 and it could provide stiff resistance to higher prices. If the market can not get above this level we would expect to see the price action continue trending lower. If, however, the market can get its legs under it and creep higher, possibly moving above $371 and/or the short-term EMA, price action may enter a holding pattern and trading range that lasts until the next earnings reporting season.