Stock Markets Analysis & Opinion

Adobe Stock Analysis: Performance, Trends, and Investment Insight

  • Adobe is a blue-chip tech stock with a high-margin business and solid cash flow.
  • The market for the stock corrected on diminished expectations for AI; AI is still expected to grow and lead this market higher.
  • Analysts trimmed their price targets but continue to see a 30% upside at the range midpoint.
  • Adobe (NASDAQ:ADBE) is among the largest diversified software companies globally. It is focused on enabling all forms of digital content creation for all users and skill levels, with business in three core operating areas.

    Adobe was originally a software company but has evolved since its founding in 1982 into a SaaS and is a leader in cloud-based services. Adobe’s core products are Creative Cloud, Document Cloud, and Experience Cloud.

    Creative Cloud is a suite of tools and applications that aid the creation of visual content, including pictures and infographics. Its services include AI-powered generative tools that can bring a vision to life with only a few inputs. Document Cloud comprises the ubiquitous Adobe Reader and the company’s document-focused enterprise. Experience Cloud is a combination of the two packaged as a B-2-B service.

    Adobe operates in two business segments: Digital Media and Digital Experience. The Digital Media segment is the largest by far, bringing in roughly 75% of the revenue in 2023. Part of Adobe’s evolution included the shift to subscription versus product sales, a bonus because of the recurring revenue stream and high margin. Subscriptions accounted for 95% of sales in Q1 2024.

    Adobe’s stock price has experienced periods of extreme volatility, including the years following the DotCom bubble, but it has only trended higher over time — investing in Adobe has rewarded shareholders. The stock broke above the DotCom highs in 2013, and its share price has risen more than 1000% since then. The latest action has the market significantly off the all-time high, providing an attractive entry point for new money.

    Adobe Stock Performance Analysis

    Adobe’s stock price has trended solidly higher over the last four decades, but it is now in one of its high-volatility periods. Volatility was brought on by the COVID-19 pandemic and its impact on global society. Among the takeaways from the COVID-19 pandemic is that digital works. The resilience of digital commerce, eCommerce, and connectivity superseded social distancing and geographical restrictions to sustain global economic activity and social interactions. Adobe is a crucial cog in the international economic machine.

    Adobe share prices were corrected by 60% when the COVID bubble burst. However, the correction did not last long and resulted in a 100%+ rebound aided by the rise of AI. AI is not a new thing per se, but advances between 2018 and 2022 led to ChatGPT in 2023 and another tech bubble. Adobe stock performance 2023 was incredible.

    The caveat for investors is that AI is an evolution of technology, not a revolution, and will take over the market. The 2023 bubble is only the first, driven by the initial ramp in estimates that are now stabilizing. Adobe is well-positioned as a provider of AI-powered services, a source of training data, and infrastructure, so it will sustain strength as the market for AI develops.

    Adobe stock analysis for the first half of 2024 shows the impact of the AI bubble. Price action began the year at a multi-year high but soon corrected due to profit-taking and caution. The correction has the market down by 22% and a lower low is likely. It is unlikely that Adobe stock will move as low as $280 again but may fall to the $400 level or lower before a solid rebound forms.

    Factors Influencing Adobe Stock Performance

    The primary factors influencing Adobe’s stock price performance are global industry trends and market sentiment. Global industry trends have tech spending accelerating to 5.3% this year, led by AI. AI is expected to more than double over the next two years, accounting for the bulk of spending.

    The issue impacting Adobe’s price negatively is that AI spending this year is focused on infrastructure, specifically NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD) chips, building them into useable clusters and deploying them for use and training. Adobe is seeing some benefit from AI's early applications but will see a more pronounced surge later as the infrastructure is developed and the technology advances.

    Global industry trends are influencing the market sentiment. Adobe’s stock price surged in 2023 as the AI bubble grew and is now receding on deflating expectations. However, the market has overdone the sell-off. Analysts have trimmed their targets for the stock price, but not enough to warrant the depth of the sell-off. The consensus target steadied after the Q1 release; it did not fall and assumes a 30% upside, with the sock trading near $475.

    Adobe authorized a new $25 billion repurchase plan at the start of the year, which can be expected to help support the price action. The new authorization is worth 12% of the market cap, with shares near their 2024 low.

    The repurchase authorization is meaningful because Adobe does not pay dividends, and they offset share-based compensation. Repurchases in Q1 helped reduce the count by 0.86% on average compared to last year. Adobe reduced its share count by 2.5% in 2023 and will likely outpace that in 2024.

    Adobe Stock Market Trends

    Adobe stock market trends are centered on AI in 2024. The rise of AI caused a bubble in 2023, bursting in mid-2024, as seen in many tech stocks analysis. However, AI is an evolution of technology that will continue to drive the market over the next few decades. It is expected to grow at triple-digit CAGR for the next five to seven years and grow more than 1000%, driving a 15X growth in industry revenue.

    A bubble is bursting now, but it is the first of many bubbles to come into what could be a frothy market.

    The next catalyst will center on revenue and earnings growth. The analysts are lowering their estimates for Q2, FY2024, and next year’s results, impacting the price action today but setting the company up to outperform down the road. And Adobe is expected to outperform the rest of the industry. Tech spending is expected to ramp up at a mid-single-digit pace in 2024; Adobe is projecting a sustained double-digit growth pace this year and next and may outperform it.

    Another factor suggesting the stock will rebound within its range if it does not move up to set a new high is its value. The price correction has the valuation down to 26X this year’s forecast and 23X next year’s, which is low for a blue-chip tech stock growing by double digits, producing cash flow, and aggressively buying back shares. That’s why the institutions like to own it. Institutional activity has been net bullish sequentially for more than eight quarters and has total ownership over 80%, including funds and public and private capital.

    Adobe's Position in the Competitive Landscape

    Adobe has numerous competitors offering individual and suites of products to rival its own, but its position in the competitive landscape is unparalleled. Adobe’s PDF document format is recognized as the international standard and is the pillar of the business.

    The company commands about 75% of the PDF market, making it easy to reach and penetrate customers with its other market-leading products. Everybody encounters PDFs routinely; anyone without Adobe Reader is digitally handicapped. The Adobe competitive analysis is good. The company has a deep moat.

    Regarding the market outlook, the document landscape is expected to grow at a 12% CAGR through 2030. Growth is supported by the expanding use of digital resources globally and deepening the penetration of products.

    Among Adobe’s many success stories is The Coca-Cola Company (NYSE:KO), which recently announced 100% in-house creation of media resources using Adobe’s Experience Cloud.

    Among the company’s weaknesses is pricing. The company is well-known for its high cost compared to similar products, which may turn some customers away. The latest price increase was initiated in November last year in select countries and will impact results as the year progresses. The upshot is that pricing drives margins. Adobe is a high-margin business with an 88% gross margin and 36% operating margin in Q1. However, much of the cash flow is used to advance and develop cutting-edge creative tools for developers.

    Investment Potential of Adobe Stock

    Adobe has investment potential. It is a blue-chip tech stock with solid and growing cash flow. The cash flow supports business growth, a healthy balance sheet, and capital returns through share repurchases. The company may initiate a dividend in the future, which would be another catalyst for the price action.

    Analysts rate the stock at Moderate Buy, which is significant because the rating is up from a Hold compared to last year. The price target is also up, 60% compared to the previous year, and rising. It is 30% above the recent price and suggests a deep value opportunity. The value is also seen in the P/E multiple, at the low end of the range for quality, growing blue-chip tech.

    Adobe stock is a Buy in this market analysis, but there are risks. Adobe may be range-bound over the next few years as AI develops, but the range is wide. A move to the analysts' consensus is worth 30%, and the all-time high is another 1000 basis points above that. Because Adobe is expected to see its revenue and earnings growth persist, and to widen margin, a move above the range is not out of the question, the question is the timing of the new highs, which may not come until 2025 or later.

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