Adobe (NASDAQ:) also got a slew of price target raises from analysts.
Typically, a 7% selloff has a fairly obvious catalyst, whether it’s a bad earnings report, weak outlook, or some industry or company news.
In the case of Adobe, the reason for its 7% stock price decline on Friday is hard to nail down. The company that brought us Photoshop, PDFs, and other document design features, posted strong earnings and raised its guidance for the rest of the fiscal year. These aren’t typically ingredients for a selloff.
Adobe generated record revenue of $5.87 billion in the quarter, an 11% increase from the same quarter a year ago. That was slightly better than estimates of $5.80 billion.
Net income was $1.69 billion in the fiscal second quarter, up 8% year-over-year, while earnings rose 13% to $3.94 per share.
On an adjusted basis, Adobe had net income of $2.17 billion, or $5.08 per share, which was up 13% compared to the same quarter a year ago. That number beat estimates of $4.97 per share.
“Our strategy to deliver ground-breaking innovation for Business Professionals and Consumers, and Creative and Marketing Professionals is delighting customers, and we are pleased to raise Adobe’s FY25 revenue target,” Shantanu Narayen, chair and CEO at Adobe, said. “Adobe’s AI innovation is transforming industries enabling individuals and enterprises to achieve unprecedented levels of creativity.”
Adobe Raises Its Guidance
Adobe also raised its revenue and earnings guidance for the rest of the fiscal year, driven by its AI innovations, including Adobe Firefly, an app that uses AI to help in content ideation, creation and production.
“The creative opportunity is expanding across audiences with AI as an accelerant. It is opening the content floodgates, tapping into everyone’s imagination and massively expanding the number of creative assets being created, edited, integrated and delivered,” Narayen said in the earnings presentation.
Heading out of the fiscal second quarter, Adobe had remaining performance obligations (RPOs) of $19.7 billion, up 10% year-over-year. This is signed contracts that have not been executed yet.
The momentum allowed Adobe to raise its annual guidance, boosting revenue to $23.50 billion to $23.60 billion, up from the previous range of $23.30 billion to $23.55 billion. That is better than analysts’ estimates and up 9% to 10% from the previous year.
Adjusted earnings were raised to $20.50 to $20.70, up from the previous guidance of $20.20 to $20.50. That new range exceeds estimates of $20.39 per share and would be 11% to 12% higher than a year ago.
“As a result of us driving strong performance in the first half of the year, we are pleased to raise our targets for FY25 total revenue, Digital Media segment revenue and EPS, as well as reaffirm Digital Experience subscription and segment revenue and Digital Media ending ARR growth for the year,” Adobe CFO Dan Durn said.
So Why Is Stock Price Dropping?
The reason for the share price dropping is a bit of a headscratcher, especially since Adobe stock is fairly reasonably valued, trading at 26 times earnings and 20 times forward earnings.
Analysts certainly weren’t driving the stock price lower, as Adobe got a slew of upgrades post earnings. BofA raised its target by $51 per share while DA Davidson boosted it by $50 per share and Wells Fargo raised it by $40 per share, to name a few. Oppenheimer lowered its target by $30 per share but still has a target of $500 per share and lists it as outperform. A $500 per share target suggests the stock will return about 28% over the next year.
Overall, Adobe has a median price target of $480 per share, which would indicate a 22% return from the current price.
Most likely, Adobe stock got caught up in the overall market selloff Friday that saw the Dow drop more than 5600 points, the Nasdaq fall about 100 points and the drop 41 points.
Investors might want to take advantage of this dip, because Adobe’s growth prospects look promising and its valuation is reasonable.