Adobe Earnings: Buy This Tech Stock Down 20% and Hold?

Adobe (ADBE) trades nearly 20% below its all-time highs heading into its Q1 FY24 earnings release on March 14.

Let’s explore the creative software giant and why investors with long-term horizons might want to consider buying the beaten-down stock and holding.  

The Headwinds  

Investors are worried about slowing top-line growth, as was the case with Meta (META) and other former growth heavyweights. ADBE’s revenue expansion cooled over the last two years following a stretch of 15% to 25% expansion. The company posted 10% sales expansion in FY23 and 12% in FY22.

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Wall Street is disappointed Adobe had to scrap its planned Figma acquisition over regulatory headwinds. Adobe now has to wait longer to deploy its cash and diversify.

There are also growing concerns about how the creative software firm will compete in a world where companies such as OpenAI enable users to generate creative content with almost no skills.

The Bullish Basics

Adobe’s industry-leading creative software is still used by everyone from Hollywood movie studios and best-selling artists to college students and offices. ADBE’s offerings include Photoshop, Premiere Pro, Illustrator, and Lightroom. On top of its core design-focused software, Adobe expanded its more traditional business-related segments beyond PDFs and e-signatures.

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The company sells its must-have creative software on a subscription basis, with various pricing levels, bundles, and beyond. The subscription model transformed ADBE into an example of consistent growth that helped it post nine-straight years of double-digit revenue expansion. Plus, Adobe is rolling out artificial intelligence features into Photoshop and more to combat new-age AI-focused challengers.  

Adobe’s revenue is projected to climb by another 10% in FY24 and 12% higher in FY25 to reach $23.91 billion—vs. $19.41 billion in FY23.

ADBE’s adjusted earnings are projected to jump by 11% and 13%, respectively. Adobe’s positive EPS revisions help it land a Zacks Rank #2 (Buy) and it beat our bottom-line estimates for five years running.

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Price, Technical Levels, and Valuation

Adobe has climbed 95% off its lows, but it’s down -3% in the last six months vs. the Zacks Tech sector’s +20% run. ADBE is down 15% since early February and 20% below its 2021 highs.

Still, Adobe stock is up 2,600% over the last 20 years vs. the Zacks Tech sector’s 540%, and 700% in the last 10 years vs. tech’s 280% and Meta's 610%.

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ADBE trades below its 200-day moving average and near oversold RSI levels. But it remains above its long-term 50-week moving average and that key trendline crossed above the long-term 200-week in December, which is a bullish signal.

Adobe trades around 60% below its 10-year highs and at a 7% discount to its median at 36.4X forward earnings.

Bottom Line

Adobe offers investors a chance to buy a proven tech stock with a robust growth outlook at a discount. But it could be prudent to wait until after its report for more insights into how it will fight off new challengers and where it might expand after its failed Figma deal. 

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