Adobe (NASDAQ; ADBE) recently announced its fiscal first quarter results for the period ending February 2025, reporting earnings of $5.08 per share on revenues of $5.71 billion. This represents a 10% year-over-year increase in sales and 13% growth in earnings. The company fared better than the Wall Street expectations, which had projected earnings of $4.97 per share on sales of $5.66 billion.
Despite exceeding analyst estimates, Adobe’s stock plunged 14% on Thursday, March 13. This can partly be attributed to an underwhelming outlook for the current quarter. Adobe projects $4.98 earnings per share on sales of $5.8 billion (at the mid-point of the guidance), slightly missing the consensus estimates of $5.00 earnings per share on sales of $5.8 billion.
The company’s remaining performance obligations—a key indicator of future business—grew by 12% to $19.7 billion. Lately, investors have been worried about slower than expected growth in generative AI for Adobe. The company reported $125 million in AI annualized recurring revenue and forecasts that number to double within the current fiscal year.
Beyond the impact of earnings, this is a concerning period for the broader markets, which creates additional challenges for Adobe. The growing economic concerns in the United States, sparked by President Trump’s implementation of tariffs, are fostering an unfavorable climate for markets in general. Adobe stock is unlikely to remain immune to these conditions. In fact, we think that ADBE stock could decline to as low as $200 per share.
Here’s the thing, in a downturn, ADBE can lose – no – there is evidence, from the recent economic downturns, that ADBE stock lost as much as 65% of its value over a span of just a few quarters. Now, of course, individual stocks are more volatile than a portfolio – and in this environment if you seek upside with less volatility than a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Why This Matters Now
While the continued growth in Adobe’s subscription business is commendable, substantial macroeconomic headwinds warrant attention. Though inflation concerns have diminished, they haven’t disappeared. The current administration’s aggressive tariff and immigration policies have rekindled inflation anxieties, potentially signaling economic turbulence ahead.
Risk Factors to Consider
The heightened geopolitical uncertainty stemming from the new administration’s bold policy initiatives presents additional challenges. With ongoing conflicts in Ukraine-Russia, trade uncertainties, and strained negotiations with long-standing allies including Canada, Mexico, and Europe, the risk landscape has grown increasingly complex.
Concerning Performance Metrics
Notably, ADBE stock has seen an impact worse than the benchmark S&P 500 index during some of the recent downturns —a critical consideration for investors evaluating their risk tolerance in today’s volatile environment.
While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.
How resilient is ADBE stock during a downturn?
Inflation Shock (2022)
• ADBE stock fell 51.2% from a high of $564.37 on 3 January 2022 to $275.20 on 2 October 2022, vs. a peak-to-trough decline of 25.4% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 5 September 2023
• Since then, the stock has increased to a high of $634.76 on 4 February 2024 and currently trades at around $380
Covid Pandemic (2020)
• ADBE stock fell 25.6% from a high of $383.28 on 19 February 2020 to $285.00 on 12 March 2020, vs. a peak-to-trough decline of 33.9% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 20 May 2020
Global Financial Crisis (2008)
• ADBE stock fell 66.7% from a high of $48.00 on 24 October 2007 to $15.98 on 3 March 2009, vs. a peak-to-trough decline of 56.8% for the S&P 500
• The stock fully recovered to its pre-Crisis peak by 12 July 2013
Adobe’s stock has declined 15% year-to-date, reflecting investor concerns about the company’s position in the generative AI space. This downward trend could potentially continue with the macroeconomic uncertainty. Surely, Adobe has demonstrated strong revenue growth, averaging 10.9% over the past three years—outpacing the S&P 500’s 6.3% growth rate during the same period. However, the stock continues to command a premium valuation with a price-to-sales (P/S) ratio of 9.0, substantially higher than the S&P 500’s P/S ratio of 3.2. So ask yourself the question: if you want to hold on to your ADBE stock, will you panic and sell if it starts dropping to $250 or even lower levels?
Holding on to a falling stock is not always easy. Trefis works with Empirical Asset – a Boston area wealth manager, whose asset allocation strategies yielded positive returns during 2008/2009 timeframe, when the S&P lost more than 40%.
Empirical has incorporated the Trefis HQ Portfolio in this asset allocation framework to provide clients better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? See the last six market crashes compared.
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