Adobe Stumbles on Earnings: Is the Dip Buyable?

Stock Markets7 minutes ago (Sep 27, 2021 08:00PM ET)

(C) Reuters. Adobe Stumbles on Earnings: Is the Dip Buyable?

Adobe (NASDAQ:ADBE) took a hit of over 4% post-earnings, as the top- and bottom-line beats failed to impress.

On the whole, Adobe clocked in a great quarter, but investors were expecting more. Going into the quarterly reveal, shares had enjoyed quite the run, and potentially unreasonable expectations.

While Adobe stock is now off over 11.6% from its all-time high, it’s still up over 24% year-to-date. I can’t say I’m too enthused about the valuation, which remains too rich for my liking. As such, I am neutral on the name.

Why Is the Stock Sinking?

You would have to do some digging to find hair on Adobe’s third-quarter results, which weren’t as bad as the post-earnings reaction suggested. The outlook was also pretty upbeat, but that’s the danger of playing hot stocks going into earnings. The expectations bar got too high, and inevitably, Adobe ended up stumbling.

The solid quarterly beat was thanks mainly to the Digital Experience segment, which should continue to garner momentum over the next 18 months, as the digital transformation trend continues.

Revenues were up around 22% year-over-year, with $3.11 in per-share earnings, beating the Street consensus by a dime. Operating margins also held strong. So, what was the problem?

Simply put, investors were expecting a more prominent beat, especially on the top line.

The name now finds itself trading at around 19.1 times sales, and 49.9 times trailing earnings. For that type of valuation, not only do investors demand strength, they demand a bit of a surprise to the upside.

As the company continues firing on all cylinders, though, it could easily pole-vault past expectations in its coming quarters.

If it doesn’t, it may be challenging for shares of the dominant creative software developer to really take off.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, ADBE stock comes in as a Strong Buy. Out of 20 analyst ratings, there are 17 Buy recommendations, and three Hold recommendations.

The average Adobe price target is $721.83. Analyst price targets range from a low of $670 per share, to a high of $770 per share.

Bottom Line

As the cloud-harnessing creative kingpin continues spreading its wings into new verticals, it’s bound to run into some competition, and that could weigh on growth, even as industry tailwinds hold strong.

Still, Adobe has some really incredible managers running the show, including its brilliant CEO, Shantanu Narayen.

There’s absolutely nothing wrong with the business. The price just remains elevated, even after the mild post-earnings pullback.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Adobe Stumbles on Earnings: Is the Dip Buyable?

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