Adobe (ADBE) has staged a nice rebound since the recent market correction. But things are starting to get shaky again. On the heels of the company’s Analyst Day meeting, Adobe stock is off about 7%, crossing below $80 in early trading.
Is today’s move a harbinger of more bad things to come? Or is there are an opportunity here with Adobe stock?
Well, first of all, let’s take a look at the new guidance, which was moderately disappointing. ADBE forecasts fiscal 2016 revenues at $5.7 billion and adjusted profits of $2.70 per share. The Street, on the other hand, was looking for $5.93 billion on the top line and $3.19 per share on the bottom.
What’s going on? No doubt, as is the case with any global tech operator, ADBE is feeling the pressure from currency headwinds. In other words, the company thinks this pressure will last for awhile.
But there is another reason for the drop-off in ADBE stock — the company is still going through a major transition from the desktop to the cloud and mobile. While ADBE has had success with several products already, there is still risk. After all, the company almost certainly started with products that would allow for smoother transitions.
Outlook for Adobe Stock
Yet the good news is that ADBE management tends to be conservative with its estimates. Besides, the company has also provided encouraging long-term growth targets. From the current fiscal year to fiscal 2018, ADBE forecasts that annual earnings growth will average about 30% and revenues will grow at about 20% per year.
The company has top-notch products that are targeting large market opportunities. The flagship offering, the Creative Cloud, includes Photoshop, Illustrator, Premiere Pro and various other apps. In the latest quarter, Adobe booked 684,000 new subscriptions, for a total of 5.3 million.
As for the other key products, they include the Document Cloud (which has Acrobat at the core) and the Marketing Cloud. Again, ADBE has been investing aggressively in these categories, especially with mobile offerings. The company has also forged of key relationships, such as partnerships with Alphabet (GOOG, GOOGL), Facebook (FB) and Yahoo (YHOO).
As for the valuation on Adobe stock, things look pretty fair at current levels. Consider that the forward price-to-earnings ratio is at about 25. By comparison, other cloud operators have much higher multiples: Salesforce.com (CRM) is trading at 77 and ServiceNow (NOW) trades at more than 150 forward earnings.
True, Adobe stock still must deal with some risks. Let’s face it, the transition to the cloud can be tough. But ADBE has already demonstrated success with several of its products.
What’s more, the company hast top-notch offerings that are targeting large market opportunities. And yes, the company thinks that its long-term growth ramp looks promising. So for investors interested in a solid cloud play, Adobe stock looks like a good option, especially on the dip.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
