Adobe (NASDAQ:ADBE) recently revealed its Q2 results (fiscal year ending in November), exceeding analyst expectations. The firm reported earnings of $5.06 per share on revenues of $5.9 billion, surpassing the consensus estimates of $4.97 per share and $5.8 billion, respectively. Moreover, Adobe raised its full-year guidance.
Despite these encouraging results, the stock experienced a modest reaction in after-hours trading, falling by 1%. This response, or lack of it, calls for a deeper analysis of the company’s financial performance and its present stock valuation. If you seek an upside with a more stable experience than individual stocks, consider the High-Quality portfolio, which has outperformed the S&P 500, achieving over 91% returns since inception. In a different context, check out – Boeing Stock Faces Fresh Crisis After 787 Dreamliner Crash.
How Did Adobe Perform In Q2?
Adobe’s revenue rose by 11% year-over-year, totaling $5.87 billion in Q2 (fiscal year ending in November). This increase was fueled by its main segments:
- Sales in the Digital Media segment increased by 11% to $4.35 billion.
- Digital Experience sales grew 10% year-over-year to $1.46 billion.
Adobe is presently benefitting from clients transitioning to its premium subscription plans, which are generating a stable revenue flow. Adobe’s Firefly, an innovative AI tool that allows users to create, modify, and enhance images and videos through simple text commands, has broadened Adobe’s suite of AI-driven creative tools, aimed at accelerating the ideation and content creation processes. Furthermore, Adobe recently announced that it is incorporating image-generation AI models from OpenAI and Google directly into the Firefly application, further enhancing its capabilities.
Adobe’s adjusted operating margin of 45.5% in Q2’25 was slightly lower than the 46% figure reported in the same quarter last year. The company also repurchased 8.6 million shares during the quarter. Increased revenues, a small drop in operating margins, and a reduced number of shares outstanding led to the company reporting a bottom line of $5.06 compared to $4.48 in the prior-year quarter.
Looking forward, Adobe has revised its full-year revenue forecast to a range between $23.5 billion and $23.6 billion, an increase from the previous estimate of $23.3 billion to $23.55 billion. The firm also expects adjusted earnings per share to range from $20.50 to $20.70, up from the earlier estimate of $20.20 to $20.50.
What Does This Imply For ADBE Stock?
ADBE stock has declined 6% this year, trailing behind the broader indices, with the S&P 500 index up 3%. Overall, ADBE stock has shown considerable volatility compared to the index over recent years. The stock’s returns were 13% in 2021, -41% in 2022, 77% in 2023, and -25% in 2024. In contrast, the S&P 500’s returns were 27% in 2021, -19% in 2022, 24% in 2023, and 23% in 2024 — indicating that ADBE underperformed the S&P in 2021, 2022, and 2024.
On the other hand, the Trefis High Quality (HQ) Portfolio, which comprises 30 stocks, has effectively outperformed the S&P 500 during the last four-year span. Why is this? Collectively, HQ Portfolio stocks yielded superior returns with diminished risk compared to the benchmark index, providing a less turbulent experience, as shown in HQ Portfolio performance metrics.
Considering the current unpredictable macroeconomic landscape, amidst ongoing geopolitical tensions, could ADBE encounter a situation akin to those in 2021, 2022, and 2024, resulting in underperformance relative to the S&P over the next 12 months — or will it bounce back? While we will soon refresh our model to incorporate the latest results and guidance for ADBE, the stock appears undervalued. At its current price of $410, ADBE stock is trading at 20x the anticipated adjusted earnings of $20.35, based on the mid-point of the provided guidance, compared to the stock’s average P/E ratio of 25x over the past three years. In fact, we currently estimate Adobe’s Valuation to be $550 per share, indicating more than 30% upside potential from current levels.
Nevertheless, it is crucial to acknowledge potential risks. Investors may moderate their valuation of Adobe due to a slower-than-expected pace of growth driven by AI. Furthermore, the stock has historically lagged behind the S&P 500 during recent market downturns, as outlined in our “Buy or Sell Adobe Stock” dashboard. Therefore, investors should cautiously consider these risks before investing in Adobe stock.
While ADBE stock seems to have the potential for growth, it is beneficial to examine how Adobe’s Peers perform on relevant metrics. You will find more valuable comparisons for companies across various industries at Peer Comparisons.