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Why Adobe Stock Lost 15% in December

By Jeremy Bowman – Jan 4, 2022 at 11:23PM

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Shares of the software giant fell after weak guidance in its earnings report.

What happened

Shares of Adobe (ADBE 3.54%) pulled back last month after the software giant known for products like Photoshop and its Creative Cloud offered disappointing guidance in its fourth-quarter earnings report. As a result, the stock fell 15% in December, according to data from S&P Global Market Intelligence.

As you can see from the chart below, the stock's sharpest drop during the month came after its earnings report came out on Dec. 16.

^SPX Chart

^SPX data by YCharts

So what

On Dec. 16, Adobe stock fell 10.2% after the company missed the mark in its fourth-quarter earnings report. 

Overall, the results were solid with revenue rising 20% to $4.11 billion and adjusted earnings per share (EPS) up 14% to $3.20. Those numbers essentially matched the analyst consensus of $4.09 billion in revenue and $3.20 in EPS.

A person looking at a tablet, with servers in the background.

Image source: Getty Images.

Growth was broad-based across the company's business segments, with digital media revenue up 21% and digital experience increasing 23%. Remaining performance obligations increased 23% to $13.99 billion, showing the company's backlog continuing to grow. The company has also upgraded its addressable market to $210 billion, showing it still has a huge market in front of it.

However, the company's guidance disappointed the market. For fiscal 2022, the company sees revenue of $17.9 billion, up 13.4% but short of the analyst consensus of $18.16 billion. On the bottom line, Adobe expects adjusted earnings per share of $13.70, up from $12.48 but below analyst estimates of $14.26.

Analysts largely lowered their price targets in response to the guidance, with some raising doubts about the company's ability to maintain its historically strong growth rate.

Now what

Adobe is one of a handful of software giants like Salesforce that have consistently delivered strong growth as a company and a stock. Adobe shares have jumped nearly 2,000% over the last decade as Adobe was an early adopter of the cloud software model. That has helped the company deliver monster profit margins, which reached 31% in 2021. 

There's no question that Adobe has a great business, but the doubts about its valuation seem fair given its slowing growth rate. After the stock's slide last month, it now trades at a price-to-earnings ratio of 44.4, which seems like a reasonable price for a tech giant growing revenue in the mid-teens. Pressure on the digital advertising ecosystem also may be building as ad targeting and third-party cookies are under assault, which may be part of the reason for the dialed-down growth expectations.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns and recommends The Motley Fool recommends Adobe Inc. The Motley Fool has a disclosure policy.

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