Shares Down 20% From Peak, Adobe Forecasts 13.3% Revenue Growth

Adobe ADBE — in which I own shares — has lost 20% of its stock market value since peaking in November. Half of that drop took place on December 16 — the second-worst day for its shares in the past decade — due to “weak guidance” for its 2022 fiscal first quarter, according to CNBC.

After speaking with Adobe executives yesterday afternoon, I hope the company has plans to accelerate its top-line growth way above the 13.3% it is forecasting for next year.

Adobe’s Mixed Fourth Quarter Financial Report

Adobe exceeded expectations for its fourth quarter but issued guidance that fell short of what analysts had forecast.

The good news? Adobe’s revenues grew 20% to $4.11 billion — $20 million above analysts’ expectations. Adjusted earnings per share of $3.20 rose 14% — meeting the consensus, according to Investors Business Daily.

The bad news was that Adobe disappointed investors with its forecast. For its fiscal first quarter ending February 2022, Adobe fell short on revenue — it expects 8% growth to $4.23 billion which is $100 million below the consensus. The company forecast earnings to reach $3.35 a share — four cents below analysts’ expectations, noted Investors Business Daily (IBD).

For fiscal 2022, Adobe forecast $17.9 billion in revenue — $216 million below expectations — and 13.3% more than its fiscal 2021 revenue of about $15.8 billion. Its adjusted earnings forecast of $13.70 per share was 56 shy of the consensus, noted IBD.

Adobe expressed optimism about its future opportunities. Shantanu Narayen, chairman and CEO, Adobe said in a statement, “Adobe’s record performance in Q4 resulted in fiscal 2021 revenue exceeding $15 billion. Adobe’s vision, category leadership, ground-breaking technology and large and loyal customer base position us well for fiscal 2022 and beyond.”

Adobe’s Sources Of Future Growth

Adobe is aiming at large market opportunities. In October I wrote that Adobe thinks those markets will be worth $147 billion by 2023. Its three businesses include:

• Its largest, Creative Cloud, includes software for creative professionals such as Photoshop and Illustrator. It targets a total addressable market (TAM) expected to grow at a 32% annual rate to $41 billion by 2023, according to an Adobe Financial Analyst Meeting Presentation.
• Document Cloud includes its Acrobat and e-signature offerings— with a TAM sprinting at a 62% annual rate to $21 billion by 2023.
• Experience Cloud provides marketing software and services. Experience Cloud’s TAM is increasing at a 15% annual rate to $85 billion by 2023.

These market opportunities will get bigger in 2024, according to Adobe’s December 16 financial analyst presentation. Specifically, by 2024 Adobe sees its TAM growing 40% to $205 billion. Its Creative Cloud opportunity will grow 53% to $63 billion; its Document Cloud TAM will rise 52.4% to $32 billion; and its Experience Cloud market opportunity will rise 29% to $100 billion.

Adobe sees the drop in its shares as an opportunity to invest in its long-term growth. As Jonathan Vaas, VP Investor Relations, told me December 16, “I see massive market opportunity with $1.9 billion in net new annual recurring revenues in 2022 from Digital Media. Digital Experience and Document Cloud are fast-growing. The [drop in our stock price] was a short term reaction due to the options market and hedge fund [trading]. For long-term investors, [the stock price decline] is an opportunity to tap into Adobe’s growth over the next five years.”

Adobe also sees opportunity from Meta’s Metaverse. In a December 16 interview, Chakravarthy largely reiterated what he told me in October about the growth drivers for Adobe’s business. He added that “people make their livelihoods around content creation and there will be a huge opportunity in the Metaverse economy.”

What Analysts Say

Analysts have set a price target of $720 on Adobe. According to MarketWatch, FactSet tallied the price targets of 31 analysts who cover the company and their average price target is $720.69.

Analysts see Adobe’s woes as resulting from short-term bumps rather than longer-term problems.

Evercore ISI analyst Kirk Materne, said that Adobe’s full-year outlook incorporated “a lot of noise” related to “foreign-exchange headwinds and a tough comparison to last year’s fiscal first quarter,” according to MarketWatch. He said that Adobe stock could be in a trading range until it reports its fiscal first quarter results after which “it will lap its tough comp and estimates can start pushing higher.”

Citi Research analyst Tyler Radke is more pessimistic — noting that Adobe’s digital-media sales would see “a year-over-year decline after two consecutive softer quarters. We expect investors to grow increasingly wary that Adobe is facing new headwinds — either reopening or competitive,” reported MarketWatch.

Deutsche Bank expected Adobe's disappointing outlook. "We do note several potential sources of conservatism including a fiscal year with one less week, a new chief financial officer, Document Cloud in context of recent DocuSign results [which drove its stock down 40% on December 3], and currency headwinds," analyst Brad Zelnick told IBD.

On December 14, JPMorgan lowered its rating on Adobe to neutral from buy, due to valuation “as part of a wave of downgrades on software companies issued by the firm,” noted CNBC.

My take? The cure for what ails Adobe stock is reporting faster than expected growth and raising its forecasts for the next several quarters.

I am hoping Adobe executives know why it is forecasting 13.3% growth while its TAM seems to be growing much faster — 40% in 2023. Why is Adobe expecting so much slower growth? Is it losing market share? If so, why? What is its plan to grow faster?