Is Adobe Stock A Buy Before Earnings? (NASDAQ:ADBE)

Elevator Pitch

I have a Buy rating assigned to Adobe Inc.’s (NASDAQ:ADBE) shares. Previously, I rated Adobe’s stock as a Hold, but Adobe is deserving of a Buy rating now prior to its Q4 FY 2022 (YE November 30) earnings announcement. ADBE’s forward P/E valuation is appealing, and negative surprises aren’t expected when it releases its quarterly earnings this week.

How Was Adobe’s Previous Earnings?

I highlighted in my prior September 10, 2022 write-up for Adobe that the company was very likely to deliver above-expectations earnings for Q3 FY 2022. I considered ADBE’s consensus financial figures, its Net New Digital Media Annualized Recurring Revenue, or ARR, management guidance, and peer DocuSign’s (DOCU) earnings beat in arriving at this conclusion.

In actual fact, Adobe’s third quarter non-GAAP earnings per share or EPS of $3.40 did come in +1.7% above the sell-side analysts’ consensus bottom line estimate of $3.34 per share.

ADBE’s adjusted EPS grew by +9.3% YoY in the previous quarter, and this is inferior to Adobe’s +21.0% YoY bottom line expansion in Q3 FY 2021. But the company’s normalized earnings growth in the most recent quarter was comparable with how it performed in the earlier quarters of the current fiscal year. Adobe saw its Q1 FY 2022 and Q2 FY 2022 EPS increase by +7.3% YoY and +10.6% YoY, respectively.

ADBE Stock Key Metrics

ADBE will be reporting its earnings for Q4 FY 2022 this Thursday, December 15, 2022 after trading hours.

In evaluating how Adobe might have performed in the fourth quarter of fiscal 2022, it is necessary to first review the market’s consensus forecasts of key financial metrics for the company.

According to consensus financial projections obtained from S&P Capital IQ, Adobe’s YoY normalized EPS growth is expected to accelerate slightly from +9.3% in Q3 FY 2022 to +9.5% for Q4 FY 2022. The analysts also predict that ADBE’s top line and bottom line will expand by +2.1% and +2.9%, respectively on a QoQ basis in the final quarter of this fiscal year.

In a nutshell, ADBE’s key metrics as per the sell-side’s consensus numbers suggest that the company should have turned in a reasonably good set of results for Q4 FY 2022.

Is Adobe Expected To Beat Earnings?

My view is that Adobe will deliver in-line earnings for Q4 FY 2022, rather than a substantial earnings beat.

ADBE had earlier guided for the company to generate a non-GAAP adjusted EPS of $3.50 in Q4 FY 2022 when it released its Q3 FY 2022 financial results in mid-September 2022. Notably, the current consensus fourth quarter bottom line estimate for Adobe is also $3.50 as per S&P Capital IQ data.

At Adobe’s Financial Analyst meeting on October 18, 2022, the company stressed that “business looks strong” in Q4 FY 2022, and noted that it has “reaffirmed” its fourth quarter guidance. However, the positive expectations regarding ADBE’s Q4 FY 2022 performance are likely to have been reflected in the current consensus financial forecasts for the stock to a large extent. 24 of the 32 Wall Street analysts covering Adobe’s shares raised their respective Q4 FY 2022 bottom line projections for the company in the last three months.

In conclusion, Adobe’s Q4 FY 2022 financial results should be decent and meet the market’s expectations, but a meaningful earnings beat for the upcoming quarterly results release is less likely to happen.

What Can You Expect From The Upcoming Earnings?

Investors are forward-looking, and it is natural that they will be focused on Adobe’s fiscal 2023 guidance when the company announces its Q4 earnings this week.

ADBE initiated new FY 2023 financial guidance at the company’s mid-October Financial Analyst meeting. Specifically, Adobe sees itself achieving revenue of $19.2 billion and normalized EPS of $15.30 in full-year fiscal 2023 based on the mid-point of its guidance. This translates into an expected +9.0% top line expansion and +12.3% increase in earnings for Adobe in FY 2023.

I expect that Adobe will reiterate the company’s 2023 guidance with its upcoming Q4 FY 2022 earnings announcement. My view is supported by the fact that software industry revenues have been more resilient than expected, and the company has initiatives in place to reduce costs and preserve profitability.

A December 9, 2022 Seeking Alpha News article cited data from IDC highlighting that worldwide “software revenues hold ground despite macroeconomic turmoil” given that “businesses continue to opt for automation to save costs and aid supply chains.” Separately, Seeking Alpha News reported earlier on December 7, 2022 that ADBE is “cutting jobs with 100 layoffs.” I think this forms part of Adobe’s expense optimization plans to support future profitability.

In summary, investors can expect Adobe to announce in-line Q4 FY 2022 earnings and reiterate its existing FY 2023 guidance this Thursday.

What Is The Long-Term Outlook?

A key factor influencing ADBE’s long-term outlook is the company’s proposed acquisition of Figma. In its September 15, 2022 press release, Adobe disclosed that it is buying “Figma, a leading web-first collaborative design platform” in a deal that is targeted to be concluded next year.

ADBE noted at its Financial Analyst meeting on October 18, 2022 that “there’s plenty of upside to that TAM (Total Addressable Market)” and stressed that “this acquisition (of Figma) really helps unlock that.” Based on the company’s estimates, Adobe claims that the 2024 TAMs for its existing products and Figma’s products are $95 billion and $16 billion, respectively.

Moving forward, the synergies associated with Adobe’s takeover of Figma will be a very significant growth driver for ADBE in the long run. Only a third of Figma’s users are designers, so this gives Adobe a big opportunity to expand its TAM by targeting other users (e.g. developers) apart from designers with the new M&A deal. Also, Figma is in a good position to grow its future sales in a big way by extending its reach to Adobe’s existing clients. An October 16, 2022 Piper Sandler (PIPR) research report (not publicly available) titled “Figma Strategy” estimated that “every 10% penetration” of “Adobe’s large installed base of 26 million paid users” will contribute to “$2B in Figma ARR.”

My opinion is that ADBE’s long-term prospects have become brighter with the potential addition of Figma’s products into its portfolio assuming that the M&A transaction is successfully completed next year as planned.

Is ADBE Stock A Buy, Sell, or Hold?

I have ADBE’s shares rated as a Buy now with expectations of in-line Q4 earnings and valuations being key considerations. As per S&P Capital IQ’s valuation data, Adobe is currently valued by the market at a consensus forward next twelve months’ normalized P/E of 22.4 times. Notably, ADBE has never traded below 22 times forward P/E between January 2013 and August 2022, and this serves as a strong indication of the stock’s current undervaluation.