What's Behind Adobe Stock's 15% Decrease?
Adobe's share price dropped by 15% within a week following the release of its Q4 results for the fiscal year 2024. Despite surpassing analyst forecasts with its top and bottom line figures, the company's projections for fiscal 2025 fell short of expectations. It seems that Adobe's progress in AI technology isn't delivering the anticipated results. Let's delve deeper into the company's performance and stock evaluation.
How Did Adobe Perform in Q4?
Adobe's revenue increased by 11% year-over-year to reach $5.6 billion in Q4 (which ends in November). The digital media segment saw a 13% growth, and the document cloud segment saw a 17% increase in sales during the quarter. The company is experiencing an uptick in customers transitioning to high-priced subscription plans, resulting in a higher average revenue per customer. Although Adobe appears to have steady revenue growth from its subscription services, its AI advancements have yet to boost revenue growth significantly. Adobe expects its fiscal 2025 revenue to fall between $23.3 and $23.55 billion, despite this figure being higher on the range, it still falls below the consensus estimate of $23.78 billion. Separately, for those seeking higher returns with less volatility, consider the *Quality Portfolio***, which has outperformed the S&P and recorded returns of over 91% since its inception.
Adobe reported an adjusted operating margin of 46.3% during Q4'24, a slight decrease from the 46.4% recorded in the previous quarter. The company also purchased 4.6 million shares during the quarter. Higher revenues, a marginal change in operating margin, and fewer shares outstanding led to a bottom line of $4.81, which was higher than the $4.27 reported in the previous quarter and exceeded the consensus estimate of $4.67. Adobe predicts its adjusted earnings in fiscal 2025 to be between $20.20 and $20.50 per share, which is below the expected earnings of $20.52 per share.
What Implications Does This Have for ADBE Stock?
ADBE stocks have experienced a 20% decrease this year, underperforming the broader market with the S&P 500 index showing a 27% increase. Over the past few years, ADBE stock performance has been quite erratic. Stock returns were 13% in 2021, -41% in 2022, and 77% in 2023. In contrast, the Quality Portfolio, comprised of 30 stocks, is significantly less volatile and has outperformed the S&P 500 every year during the same period.
Given the current unpredictable economic climate with potential rate cuts, could ADBE encounter a performance similar to its 2021 and 2022 underperformance compared to the S&P 500 in the following 12 months – or will it experience significant growth? Although our model will soon be updated to incorporate the latest results and guidance from ADBE, the stock appears to offer ample room for expansion. Currently, ADBE stocks are trading at 11x trailing revenues, compared to the stock's average P/S ratio of 14.6x over the past five years.
While ADBE stocks show signs of potential growth, it's beneficial to examine how Adobe's Competitors emerge on relevant metrics. You'll find various comparisons for companies across industries at Peer Comparisons.
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- Despite surpassing analyst forecasts in Q4, Adobe's advanced valuation for fiscal 2025 fell short of expectations, leading to a 15% decrease in Adobe's share price within a week.
- The Adobe revenue for Q4 reached $5.6 billion, an 11% year-over-year increase, but the company's projections for AI technology-driven revenue growth in fiscal 2025 fell below expectations.
- Adobe's revenue from Adobe Stock, a part of its digital media segment, saw a 13% growth in Q4, but the company's reliance on subscription services has not translated into significant revenue growth from its AI advancements.
- As Adobe's AI valuation may not be delivering the anticipated results, investors might consider stocks from the Quality Portfolio, which has consistently outperformed the S&P 500 in the past few years.
