Adobe (ADBE 2.00%) posted its latest earnings report on Dec. 13. For the fourth quarter of fiscal 2023 (which ended on Dec. 1), the cloud software giant's revenue rose 12% year over year (13% in constant currency terms) to $5.05 billion and surpassed analysts' estimates by $30 million. Its adjusted EPS grew 19% to $4.27 and beat expectations by $0.13 per share.
Those headline numbers seemed healthy, but Adobe's stock dropped in response to its lackluster guidance and regulatory challenges. Let's see whether that decline was justified -- and if Adobe's stock might still head higher over the next 12 months.
Image source: Getty Images.
The key numbers on Adobe
For the full year, Adobe generated 73% of its revenue from its digital media business, which houses its Creative Cloud (Photoshop, Premiere Pro, Illustrator, and other digital media applications) and Document Cloud (Acrobat and Sign) services. It generated 25% of its revenue from its digital experience segment, which provides other enterprise-oriented marketing, commerce, and analytics services. Here's how those two businesses fared over the past year in constant currency terms.
|
Growth by Segment (YOY) |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Digital media revenue |
14% |
14% |
14% |
14% |
14% |
|
Digital experience revenue |
16% |
14% |
14% |
11% |
11% |
|
Total revenue |
14% |
13% |
13% |
13% |
13% |
Data source: Adobe. Constant currency terms. YOY = year over year.
The stable growth of Adobe's digital media segment offset the slower growth of its digital experience business, which faced tougher macro headwinds as large companies reined in their cloud spending. Digital media held steady because most media professionals won't cancel their subscriptions for its industry-standard production tools just to save a few dollars.
NASDAQ: ADBE
Key Data Points
Adobe didn't execute any major layoffs over the past year, but it did optimize its R&D and marketing expenses. That's why its adjusted operating margin rose from 45.1% in fiscal 2022 to 45.9% in fiscal 2023. During the conference call, CFO Dan Durn said it would strive to keep its adjusted operating margin in the "mid-40s" -- even as it ramps up its spending on new artificial intelligence (AI) services and works toward closing its $20 billion acquisition of Figma.
Why did Adobe's stock drop?
Adobe's core businesses are still growing, but its guidance disappointed investors. For the full year, its revenue rose 13% in constant currency terms and 10% on a reported basis. But for fiscal 2024, it only expects its revenue to climb 10%-11% on a reported basis versus the consensus forecast for 12% growth.
That softer-than-expected outlook suggested that Adobe's new generative AI tools wouldn't significantly boost its near-term revenue, even though they could potentially increase the stickiness of its ecosystem with tools for creating AI-generated images, photos, and 3D models while accelerating tasks across its enterprise-oriented services.
Adobe also disclosed that the Federal Trade Commission (FTC) had been investigating the strict rules for canceling its subscriptions over the past 18 months. It warned that it could incur "significant monetary costs" to resolve that matter. Its pending acquisition of Figma, which was originally scheduled to close this year, also remains in limbo amid antitrust challenges in Europe. Opponents of the deal claim the purchase of Figma -- Adobe XD's top competitor in the user interface and user experience design markets -- would enable it to dominate the niche space and unfairly strengthen its ecosystem.
Adobe expects its adjusted EPS to rise 10%-12% in fiscal 2024, which was slightly higher than analysts' forecast for a 10% increase. However, that would still represent a slowdown from its 17% growth in fiscal 2023, and it doesn't include the potential impacts from the Figma deal or the ongoing FTC investigation on its bottom line.
Those issues seemed to drive investors to finally take profits in Adobe stock, which had already risen 86% year to date prior to the company's latest earnings report. A lot of that growth was driven by the buying frenzy in AI stocks, which boosted its valuation to historical highs. But at $590 per share, Adobe still doesn't look cheap at 33 times forward earnings.
Where will Adobe's stock be in a year?
Adobe had a great run over the past year, but I believe 2024 will be tougher as it struggles to meaningfully ramp up its generative AI services, navigates a tricky FTC investigation, and tries to close its takeover of Figma. Adobe's stock probably won't plunge off a cliff, but it could struggle to outperform the market and justify its premium valuation.
