Diversified software company Adobe Inc. (ADBE) operates through three segments: Digital Media; Digital Experience; and Publishing and Advertising. The company serves professionals, marketers, content creators, application developers, consumers, enterprises, advertisers, merchandisers, web analysts, and data scientists.

ADBE delivered strong financial results for the second quarter. The company achieved record revenue during the quarter, driven by solid demand across Creative Cloud, Document Cloud, and Experience Cloud. It reported more than $2 billion in operating cash flows, demonstrating its growing revenue streams and financial discipline.

“Our operating model continues to fuel consistent growth, enabling the company to invest in category-leading cloud solutions and emerging innovations that are gaining traction in the marketplace,” said Dan Durn, ADBE’s executive vice president, and CFO.

In June, ADBE unveiled innovations for its customer data platform (CDP), Adobe Real-Time CDP, to assist global brands in transitioning from third-party cookies to first-party data. To accelerate the first-part data strategy, Adobe introduced enriched customer profiles with commerce, AI-powered targeting, new privacy tools, and Segment Match across channels.

In the same month, ADBE announced significant updates to Adobe Substance 3D, a suite of tools and services that support 3D content creation. The updates include a 3D Materials SDK for developers, powerful new plugins, and native Apple M-series chips support for Painter, Designer, and Sampler. Substance 3D applications demonstrate strong demand by surpassing 100% year-over-year growth.

Despite strong financials and bright growth prospects, ADBE is expected to face several macroeconomic and geopolitical headwinds in the upcoming months, including the impact of the ongoing war in Russia-Ukraine and the company’s decision to cease all new sales in Russia and Belarus, the increase in effective tax rates, and an incremental FX headwind of $175 million the third quarter and fourth quarter revenue.

Shares of ADBE have declined 22.2% year-to-date and 30% over the past year to close the last trading session at $439.03. The stock is currently trading 37.2% below its 52-week high of $699.54, which it hit on November 22, 2021.

Here is what could influence ADBE’s performance in the upcoming months:

Robust Financials

ADBE’s revenue increased 14.4% year-over-year to $4.39 billion, and its gross profit grew 13.5% year-over-year to $3.85 billion in the fiscal 2022 second quarter ended June 3, 2022. The company's non-GAAP operating income amounted to $1.97 billion, up 12% year-over-year.

Furthermore, the company’s non-GAAP net income and net income per share came in at $1.59 billion and $3.35, registering increases of 8.9% and 10.6% from the prior-year period, respectively.

Favorable Analyst Estimates

Analysts expect ADBE’s revenue for the fiscal 2022 third quarter (ending August 2022) to come in at $4.44 billion, representing an increase of 12.9% from the same period in 2021. The current quarter's $3.35 consensus EPS estimate indicates a 7.6% year-over-year increase. The company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

In addition, ADBE’s revenue and EPS for the fiscal year 2022 (ending November 2022) are expected to rise 12% and 8.5% year-over-year, respectively. Also, analysts expect the company’s revenue and EPS for the next year to grow 14% and 17.6% year-over-year, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, ADBE is currently trading at 32.42x, 67.8% higher than the industry average of 19.32x. The stock’s forward EV/Sales multiple of 11.58 is 279.4% higher than the industry average of 3.05. Also, its forward EV/EBITDA and Price/Sales ratios of 23.31 and 11.62 compared with industry averages of 13.22 and 3.00, respectively.

Furthermore, in terms of forward Price/Cash Flow, ADBE is currently trading at 26.64x, 38.7% higher than the industry average of 19.21x.

High Profitability

ADBE's trailing-12-month gross profit margin of 87.87% is 74.6% higher than the 50.33% industry average. Its trailing-12-month EBITDA margin of 39.91% is 205.9% higher than the 13.05% industry average. Likewise, the stock's trailing-12-month net income margin of 29.29% compares with the industry average of 4.25%.

Furthermore, ADBE’s trailing-12-month ROCE, ROTC, and ROTA of 35.13%, 20.34%, and 18.57% are higher than the industry averages of 7.28%, 3.96%, and 2.74%, respectively.

POWR Ratings Do not Indicate Enough Upside

ADBE has an overall rating of C, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

ADBE has a grade of A for Quality, in sync with its higher-than-industry profitability multiples. In addition, ADBE has a D grade for Momentum. This is justified as the stock is currently trading below its 200-day moving average of $477.26.

Furthermore, ADBE has a grade of C for Stability. The stock’s beta of 1.39 justifies the Stability grade.

Of the 154 stocks in the Software-Application industry, ADBE is ranked #33.

Beyond what I have stated above, we have also given ADBE grades for Sentiment, Growth, and Value. Get access to all the ADBE ratings here.

Bottom Line

Despite reporting promising latest quarterly results, investors have been bearish about ADBE, owing to its sky-high valuation and relatively low stability. Moreover, the company is expected to remain under pressure in the coming months due to various macroeconomic and geopolitical headwinds. Thus, investors should wait for a better entry point in the stock.

How Does Adobe Inc. (ADBE) Stack Up Against its Peers?

While ADBE has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, IBEX Ltd. (IBEX), American Software, Inc. (AMSWA), and Progress Software Corporation (PRGS), which have an A (Strong Buy) rating.

ADBE shares were trading at $425.97 per share on Friday afternoon, down $13.06 (-2.97%). Year-to-date, ADBE has declined -24.88%, versus a -10.31% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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