Adobe stock has seen a 15% fall in a week after the company reported its Q4 results for fiscal 2024. Although the top and bottom-line figures were ahead of the street estimates, its fiscal 2025 guidance was underwhelming. It appears that the company’s AI advancements aren’t paying off as anticipated. Let’s dive deeper into the company’s results and its stock valuation.
How Did Adobe Fare In Q4?
Adobe’s revenue rose 11% y-o-y to $5.6 billion in Q4 (fiscal ends in November) and slightly above the street estimate of $5.5 billion. Digital media segment sales grew 13% and document cloud sales were up 17% y-o-y during the quarter. The company is benefiting from migration of customers to high-priced subscription variants, driving the average revenue per customer higher. Although Adobe seems to have a stability in revenues from its subscriptions offerings, the AI advancement hasn’t helped it achieve a better revenue growth rate thus far. The company has guided for fiscal 2025 revenues to be in the range of $23.3 and $23.55 billion, which even at the higher end of the range is below the consensus estimate of $23.78 billion. Separately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Adobe’s adjusted operating margin of 46.3% in Q4’24 was slightly below the 46.4% figure it reported in the prior-year quarter. The company also purchased 4.6 million of its shares during the quarter. Higher revenues, a marginal change in operating margin, and fewer shares outstanding resulted in the company’s bottom line of $4.81, versus $4.27 in the prior-year quarter, and above the consensus estimate of $4.67. Adobe expects its fiscal 2025 adjusted earnings to be in the range of $20.20 and $20.50 per share, which is below the street estimates of $20.52 per share.
What Does This Mean For ADBE Stock?
ADBE stock is down 20% this year, underperforming the broader indices, with the S&P 500 index up 27%. Overall, the performance of ADBE stock with respect to the index over the recent years has been quite volatile. Returns for the stock were 13% in 2021, -41% in 2022, and 77% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts, could ADBE face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? While we will soon update our model to reflect the latest results and guidance for ADBE, the stock seems to have ample room for growth. At its current levels of $465, ADBE stock is trading at 11x trailing revenues, versus the stock’s average P/S ratio of 14.6x over the last five years.
While ADBE stock looks like it has room for growth, it is helpful to see how Adobe’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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