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Stock Analyst Update

Good Quarter for Adobe; Environment Weighing on Full-Year Outlook; FVE Down to $500

Still, we see shares as attractive for long-term investors.


Wide-moat Adobe reported good second-quarter results, including upside for both the top and bottom lines, as well as solid net new digital annually recurring revenue, or ARR. The full-year outlook was lowered and third-quarter guidance was below our expectations, driven by more pronounced summer seasonality, the Russia-Ukraine war, worsening foreign exchange rates, and a higher tax rate. Despite these issues, we remain confident in Adobe’s ability to execute against its strategy, as reflected in their unwavering ARR targets. Given the near-term outlook along with mounting macro pressures, we have lowered our growth expectations throughout our 10-year forecast and are thus lowering our fair value estimate to $500 from $615. We see heightened sensitivity to a possible slowdown within the advertising arena. Still, we see shares as attractive for long-term investors.

Second-quarter revenue grew 15% year over year in constant currency to $4.386 billion, compared with guidance and FactSet consensus of $4.34 billion. Digital media revenue grew 16% year over year while digital experience, or DX, sales grew 18% year over year, with both segments ahead of our model. Publishing and advertising declined 17% year over year, which is not a concern as this segment is noncore. Adobe noted solid demand throughout the quarter from individuals, SMB, and enterprise customers, as Adobe expands their portfolio for digital media and DX. We remain impressed with Adobe’s ability to grow their user base and reach retention rates above pre-pandemic levels.

Non-GAAP operating margin was 45.0%, compared with 45.9% a year ago and 46.8% last quarter, representing continued operating excellence. Remaining performance obligation grew 13% year over year to $13.820 billion, while current deferred revenue grew 15% year over year to $4.753 billion. Considering the headwinds, we believe these metrics signal healthy fundamentals for Adobe.

Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.