Outlook Cut Forces Adobe Stock to Plunge, Where’s the Bottom?

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Adobe Inc (NASDAQ:ADBE) stock price is trading around 6% lower on Friday after the software company released a weaker-than-expected full-year forecast.

Adobe reported second-quarter adjusted earnings per share (EPS) of $3.35, topping the consensus estimates of $3.31 per share, according to Refinitiv. Revenue came in at $4.39 billion, up 14% year-over-year, and above the analyst consensus of $4.34 billion. Net income in the quarter totaled $1.18 billion, up roughly 6% from the same period last year.

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The company’s Digital Media unit, which develops Creative Cloud and Document Cloud softwares, generated $3.20 billion in revenue, up 15% year-over-year and beating the consensus projection of $3.16 billion. Revenue from the Digital Experience business stood at $1.10 billion, up 17% year-over-year, while analysts were looking for $1.08 billion.

Adobe ended the second quarter with more than $5 billion in cash, cash equivalents, and short-term investments. The San Jose, California-based software maker will be searching for acquisition targets in the coming period as market prices are significantly more reasonable now following the sharp drawdown this year.

In this context, CEO Shantanu Narayen commented that “there are going to be a number of small single-product companies that are probably not going to survive what’s happening and the valuation sort of multiple changing is actually, I think, good for a larger company like Adobe.”

Weak Guidance Not Surprising

Looking ahead, Adobe trimmed its guidance for the full fiscal 2022. The company now expects a full-year adjusted EPS of $13.50 on revenue of $17.65 billion, down from the previous forecast of $13.70 in adjusted EPS on revenue of $17.90. The updated guidance missed the consensus projection of $13.66 in adjusted EPS on revenue of $17.85 billion.

A guide down came as a result of the $175 million Forex headwind that emerged after Russia’s invasion of Ukraine as the greenback notably strengthened against the basket of currencies after the Federal Reserve hiked interest rates to curb inflation.

Adobe’s CFO Dan Durn also noted significant uncertainty in the economic environment in Q2, though he said that the company had a successful period when it comes to talent acquisition amid a highly competitive labor market.

During the second quarter that ended June 3, Adobe raised prices for some of its Creative Cloud subscription packages following the rollout of new software. David Wadhwani, President of Adobe’s Digital Media unit, said the company did not go for a greater price hike as its main focus was expanding the user base.

Can Free-To-Use Photoshop Help Revenue Growth?

While Adobe did increase the prices of some software products, the tech giant said earlier this week it was testing a free-to-use web version of Photoshop. The company plans to let everyone use the photo and design software in an effort to bring new users to the app.

Adobe said it started testing the free version of Photoshop in Canada, where users can access the app via their free Adobe accounts on the web. Even though some features will remain exclusive to paid subscribers, Adobe said the free version of Photoshop will contain enough core functions that will allow everyone to perform.

“We want to make [Photoshop] more accessible and easier for more people to try it out and experience the product,” says Maria Yap, Adobe’s VP of digital imaging.

The company first introduced the free web version of the app back in October, which allowed users to make just simple designs and edits. Adobe has been making numerous updates to the app since then, bringing a handful of new features to its users.

The company’s ultimate goal is to increase the accessibility of Photoshop and lure more users who will later decide to pay for the full version. Along these lines, investors will hope that a larger installed base can help Adobe to strengthen cash flow with the results showing revenue soared 14% year-over-year.

Adobe Stock Outlook

Adobe shares are trading roughly 40% lower year-to-end (YTD) amid a challenging macro environment imposed by high inflation and aggressive tightening by the Federal Reserve.

Shares are down over 50% compared to the all-time high set in November last year while today’s drop to below $350 marks a fresh 25-month low.

While an extremely aggressive Fed is now almost fully priced in, investors’ concerns over the U.S. heading towards a recession are growing. According to some analysts, the S&P 500 could drop yet another 10-15% if the recession is confirmed.

This move lower in the U.S. equities could result in Adobe stock price heading towards the $300 handle despite trading at nearly $700 just a few months earlier. Getting exposure to a stable FCF generator like Adobe at an attractive price offers a unique long-term investing opportunity.

Summary

Adobe shares are down on Friday after the software company offered lighter-than-expected full-year guidance. This is not surprising given rising macro headwinds with shares now trading more than 50% lower compared to the all-time high set eight months ago.

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