Adobe stumbles into another buy-the-dip opportunity

Adobe’s NASDAQ: ADBE FQ4 results echoed Oracle’s NASDAQ: ORCL, causing the shares to fall following the release. The primary cause for the decline is the guidance, which is favorable to shareholder value but slightly less than the analysts expected. The takeaway is that business remains robust, growth will persist, and cash flow is solid, providing ample liquidity to improve the balance sheet and buy back shares. 

In this environment, the analysts may reset their outlook, but the market should continue to trend higher once it has had a chance to consolidate the substantial gains made in 2023. The stock rose more than 80% for the year and needs a healthy correction to continue trending higher in 2024. 

Adobe has a solid quarter, issues soft guidance

Adobe had a solid quarter with revenue of $5.05 billion, growing 11.5% YOY to set a company record for the 2nd year. This is the first quarter of above-$5 billion revenue, and it won’t be the last. Revenue outpaced the consensus estimates by 60 basis points on Digital Media and Digital Experience strength. Digital Media grew by 13%, with Creative Cloud up 12% and led by a 14% gain in Document Cloud. Subscription is the only one to post growth on a revenue stream basis and was offset by slight declines in Products and Services. 

The margin news is equally good, with the gross margin holding flat YOY and the operating and net income margins improving. Adjusted operating income came in at $2.34 billion or about 46% of revenue, with the cash flow margin also strong and the GAAP and adjusted earnings growing and outpacing the consensus expectations. GAAP EPS grew by 27% and adjusted 19% to $4.27 or $0.13 better than expected. 

The guidance is good but slightly below the analyst consensus and may be cautious given the Fed’s shift in policy. The Fed expects three interest rate cuts next year, which should help stabilize business spending today and lead to increased spending as the year progresses. Additionally, the RPO of $17.22 billion is up 13% YOY, leading revenue and indicating momentum will continue in the current and following quarters. 

Regardless, the $5.10 to $5.15 billion in expected Q1 revenue and $17.60 to $18.00 in annual adjusted EPS align with the analysts' expectations and suggest strength in the back half of the year, no reason to close out a position but cause enough for some to trim and take profits. 

Adobe repurchases roll on; shareholder equity rises 17% 

Adobe had a fortress balance sheet before Q4, which is stronger now. The company’s revenue leverage and cash flow allowed for an increase in cash, current and total assets while debt and liabilities remain flat. This has debt at 0.12X assets and 0.22X shareholder equity, providing ample financial flexibility and leverage should the need arise. Until then, buybacks are expected to continue at a solid pace. The buybacks in 2023 reduced the share count by more than 2% YOY, and ample funding is available under the current authorization. 

The Q4 results and guidance did not spark any analyst upgrades or price target revisions yet, but it was sufficient for several to come out in defense of the stock. The takeaway is that the share price is trending higher but has outrun reality. The analysts are resetting their outlook for the coming year but still rate it at Moderate Buy with a price target of $613. The $613 price target is trending firmly higher but may present a hurdle for the market. It assumes the stock is already trading at fair value, so it may be another quarter or two before another new high is set. 

The technical outlook: Adobe reaches the top of the wall

Adobe price action is trending higher but peaking within the trend. The tech stock could pull back to the $570 level or lower without something to reinvigorate buyers. The critical support is near $520 and may be reached early in 2024.