As seen in the past week, the market has reacted negatively to Adobe’s (NASDAQ:ADBE) latest earnings release. ADBE stock has experienced a double-digit percentage decline in price since it reported numbers before the open on Dec. 16.
What drove such a reaction? Not so much its actual results for its fiscal fourth quarter, and full fiscal year (ending Dec. 3). Both revenue and earnings for the cloud-based provider of content creation software were in line with analyst consensus.
Instead, it was the company’s fiscal 2022 outlook that had many making a mad dash out of shares.
However, like we’ve seen with other tech names lately, this was an overreaction. With recent uncertainties putting the market on edge, they’ve taken what amounts to minor concerns, and are turning this into a reason to head for the exits.
This only adds to the volatility tech stocks are experiencing now. However, there’s a silver lining. After its drop back below $600 per share, now may be the time to lock down a long-term position.
A rebound may not happen in a matter of days or weeks. But strong results could drive one, when it next reports quarterly numbers. Coupled with its potential to continue delivering strong long-term returns, consider it a buy at today’s prices.
ADBE Stock and the Market’s Reaction to Guidance
With its recent results, Adobe reported solid numbers for both its fiscal fourth quarter, as well as the full fiscal year 2021. Revenue growth for Q4 and FY21 both came in at above 20%. Again though, these strong results were not enough to counter what they perceived as bad guidance, for both next quarter, and for the upcoming year.
For Q1 2022, the company projects $4.23 billion in revenue, and quarterly earnings-per-share (EPS) for ADBE stock of $3.35. That was below analyst expectations of $4.36 billion, and EPS of $3.40.
For FY22, Adobe projects $17.9 billion in revenue and EPS of $13.70. This number came in short of analyst projections, which had called for $18.2 billion in sales and EPS of $14.20. These projections also imply a slowdown in topline growth for the coming year, with FY22 guidance coming in at around 13% above total sales for FY21 ($15.8 billion).
Obviously, releasing guidance below expectations is not ideal. But did doing so justify this much of a selloff? Hardly. It’s clear this guidance miss is overblown. This points to it recovering quickly from its recent losses.
Adobe Remains a Solid Long-Term Holding
This latest development may be affecting the performance of ADBE stock in the immediate term. But I wouldn’t say it’s going to be something that affects its performance a few months down the road. At least, that’s the takeaway from an argument presented by Evercore ISI analyst Kirk Materne, following the recent earnings release.
Pointing to how Adobe has historically under-promised and over delivered when it comes to guidance, we could see the company deliver stronger-than-expected numbers when it next reports in March 2022. Between now and then, shares could start bouncing back from their recent losses.
What about on a longer timeframe? With growth slowing down in the coming year, I’ll admit that gains during this timeframe may wind up far less impressive than what we’ve seen in 2020, and in most of 2021. Still, that doesn’t mean its days as a long-term winner for your portfolio are over. Mainly, because any deceleration we see in FY22 could be temporary.
As the total addressable markets (TAMs) for Adobe’s three key cloud-based software segments (Creative Cloud, Document Cloud and Experience Cloud) continue to expand, revenue and earnings growth will likely speed back up at some point. This, plus efforts like the company’s $15 billion stock repurchase plan, will help continue to drive strong long-term returns.
The Verdict on ADBE Stock
Earning a “B” rating in my Portfolio Grader, the market’s uneasy feelings about growth stocks could continue to weigh on it for now.
But a few months down the road, this uneasiness could clear up. Sentiment for tech stocks could go from “on the fence,” back to bullish. If it also delivers stronger-than-expected Q1 results, ADBE stock could reverse some, if not all, of its recent losses.
On a longer timeframe, the post-pandemic growth deceleration will reverse. Analyst projections call for Adobe to see its revenue and earnings growth for FY23 come in at 14.7% and 17.3%, respectively.
Looking to scoop up relative bargains after tech’s recent selloff? ADBE stock is one of your best options. It could bounce back in a matter of months, and continue to deliver strong returns in the years ahead.