ADBE with Nobias technology: Adobe: Down 20% From Its 52-Week High, Is This Stock A Buy?
Abode (ADBE) has been one of the greatest growth stories in the technology sector in recent years. This stock doesn’t get the same sort of fanfare that the vaunted F.A.N.G. names (Facebook, Amazon, Netflix, and Google) receive; however, its growth stacks up well against its popular big-tech peers. Since 2014, Adobe shares have posted double digit annualized earnings-per-year growth every year. During this period of time, ADBE’s EPS has risen from $1.29 to $12.48. With that in mind, it’s no wonder that ADBE shares have generated a lot of wealth for its long-term shareholders.
Over the last 5 years, ADBE is up approximately 437.5%. However, during the last year, the stock’s performance has slowed down. Adobe shares fell 14.95% last week, pushing their year-to-date returns down to just 11.30% (which is less than half of the 23.0% performance posted by the S&P 500 thus far in 2021). This dip came on the heels of ADBE’s fourth quarter earnings report, which was posted this week, on December 16th. Frankly put, when looking at an ADBE chart over the last 5 years or so, weakness in this company’s share price is a very rare occurrence. And therefore, now that shares are down double digits from their recent highs, we wanted to take a look at what the community of credible authors that the Nobias algorithm tracks have been saying about the stock to see whether or not this is a dib that investors should consider buying.
Coming into its Q4 report, Richard Bowman, a Nobias 5-star rated analyst, highlighted the fact that ADBE had beaten Wall Street’s expectations on the bottom line in 11 consecutive quarters and analysts’ sales estimates in 5 consecutive quarters.
Coming into Q4, ABDE stock was trading with a relatively high valuation. The stock’s blended price-to-earnings ratio was north of 50x. This is a growth stock, meaning that the market trends to evaluate shares based upon expectations of future cash flows. Therefore, when looking at analyst expectations for 2022 EPS, ADBE shares were trading with a forward P/E multiple of 46x (based upon a share price of approximately $630 and 2022 consensus EPS estimates of approximately $13.71). In other words, ADBE’s forward P/E ratio was more than twice as high as the S&P 500’s (the broader market currently trades for approximately 21x forward earnings expectations). Therefore, one might argue that shares were priced to near perfection.
ADBE Dec 2021
Bowman noted that coming into the quarter, Wall Street expected to see, “Fourth quarter analyst estimates” of:
* Normalized EPS: $3.20, up 52% YoY
* GAAP EPS: $2.53, down 45% YoY (due to an income tax expense in 4Q20)
* Revenue: $4.09 bln, up 19% YoY
Well, for the quarter, management produced results which beat on the top-line and came in-line on the bottom. ADBE’s revenue came in at $4.11 billion during Q4, up 20.2% on a year-over-year basis. ADBE’s non-GAAP earnings per share came in at $3.20, up 52% y/y and exactly in-line with analyst consensus estimates. Looking at the results, which still represented strong y/y growth, it’s clear that it wasn’t the fourth quarter numbers which sparked the stock’s sell-off. Instead, it was the company’s forward looking guidance, which points towards a slowdown. And, when shares are priced to perfection, any slowdown will not be tolerated by the market.
Brandon Michael, a Nobias 5-star rated analyst, highlighted ADBE’s recent dip in his market roundup article on the 16th. Michael wrote, “Adobe offers a suite of software solutions to clients globally. This includes but is not limited to its Adobe Creative Cloud, Document Cloud, and Experience Cloud offerings. All of these allow Adobe to cater to creatives, students, small businesses, government agencies, and even global brands.” He noted that the company’s down was down double digits after the market digested the company’s earnings conference call.
Simply put, he highlighted the poor guidance that Adobe management provided, saying, “Moving along, in its most recent quarterly reporting, ADBE estimated revenue of nearly $17.9 billion and adjusted profit of an estimated $13.70 a share for fiscal 2022. The expectation from Wall Street are revenues of $18.2 billion and earnings of $14.26.”
Nicholas Rossolillio, a Nobias 5-star rated author who writes for The Motley Fool, recently published an article highlighting ADBE’s slowing growth. He wrote, “For example, adjusted earnings per share rose 28% in fiscal Q3. Based on management's guidance for fiscal Q4, adjusted earnings per share will only rise by about 13% year over year. But even if Adobe doesn't beat its own outlook, its full-year adjusted earnings would still be up by a very healthy mid-20% amount.”
Rossolillio’s piece was published days before ADBE’s Q4 results were posted, but since the company’s results were in-line with the market’s expectations for Q4, his rationale, with regard to fiscal 2021’s growth rates remain intact. Although Rossolillio’s opinion was posted without knowledge of management’s poor guidance provided during the Q4 conference call, he did highlight his outlook for the company’s near-term future, providing a rather bullish outlook, saying, “The company will be lapping a strong 2021, but this long-term shareholder is optimistic. With digital creators beginning to build next-gen experiences for the web, streaming video services, and the workplace, demand for creativity software isn't going to abate any time soon.”
Rossolillio continued, “This bodes well for Adobe's continued success. The cloud-computing company has built itself into a hub for digital transformation, helping its users unlock new efficiencies and update their digital toolsets. Trillions of additional dollars will be spent on digital transformation in the coming decade, and capturing even a small fraction of that will deliver big gains for Adobe. 2022 may or may not be great for Adobe stock, but investors should stay focused on this company's potential over periods of many years -- not just one.”
Royston Yang, another Nobias 5-star rated author who writes for The Motley Fool, recently highlighted his bullish opinion of ADBE in a recent article titled, “3 Growth Stocks that Could Double in 2022”. With regard to Adobe’s recent growth, Yang said: “The SaaS company has displayed steady growth in subscription revenue from its fiscal year 2018 to fiscal year 2020. Over this period, subscription revenue increased from $7.6 billion to $11.6 billion and its proportion of total revenue has also jumped from 84.2% to 90.3%. The momentum has carried into 2021 with revenue for the first nine months of this year rising by 23.6% year over year to $11.7 billion. Subscription revenue took up 92.2% of total revenue for the period, underscoring the increasing importance of subscription sales in driving Adobe's total revenue. Ultimately, net income climbed by 19.2% year over year to $3.6 billion.”
With regard to his future outlook for the company, Yang wrote: “With a strong brand name and continuous and innovative enhancements to its slate of cloud services, Adobe should continue to garner more clients and grow its subscription base further. With a stronger base of customers and ongoing digital adoption, coupled with its robust software-as-a-service model of landing and expanding, Adobe stands a great chance of doubling next year.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In short, it appears that he remains bullish over the long-term, with a similar stance to Rossolillio’s. Overall, when looking at the community of credible authors and analysts that the Nobias algorithm tracks in aggregate, we see an overwhelmingly bullish lean. 93% of the credible authors that we track have recently expressed a “Bullish” opinion of ADBE shares.
Looking at the blue chip (4 and 5-star rated) Wall Street analysts that we track, the average price target on ADBE shares is currently $728.55. It’s worth mentioning that we’ve seen 10 such analysts (4 and 5-star rated) update their price targets on ADBE since 12/16 when the company posted Q4 earnings. Of these 10 rates, the average price target is $671.70.
While this is lower than the average overall target (which implies that as more and more analysts updated their opinion with the new 2022 guidance data in mind, the overall average is likely to fall) it’s important to note that this $671.70 average still implies upside potential of approximately 20.7% when compared to ABDE’s current share price of $556.64.
At $556.64, ADBE shares are trading with a 20.4% discount, relative to their 52-week high of $699.54. While it’s unclear where the stock will find a near-term bottom, when looking at the average recent opinion of the credible authors/analysts that we track, it appears that the vast majority of them view this recent 20% pullback as an attractive buying opportunity.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long FB, AMZN, and GOOGL. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.