Is Adobe Stock a Buy Now?

Adobe's (ADBE 1.29%) stock price dipped 5% during after-hours trading on June 16 following the release of its second-quarter earnings report. The cloud-based software company's revenue rose 14% year over year (15% in constant currency terms) to $4.39 billion, which beat analysts' expectations by $40 million. Its adjusted net income grew 9% to $1.59 billion, or $3.35 per share, which cleared analysts' estimates by four cents.

However, Adobe followed up that earnings beat with bleak guidance for the rest of the year. For the third quarter, it expects its revenue and adjusted EPS to grow 12% and 7% year over year, respectively, compared to the consensus forecast for a 14% increase in revenue and 9% EPS growth.

Image source: Getty Images.

For the full year, Adobe expects its revenue to rise 12% to $17.65 billion, and for its adjusted EPS to increase 8%. That forecast was well below its previous guidance (and analysts' expectations) for 13% revenue growth with a 10% increase in its adjusted EPS.

That would also represent a significant slowdown from fiscal 2021, when Adobe's revenue and adjusted EPS rose 23% and 24%, respectively. Let's review the key reasons for that deceleration, if the company can overcome those near-term headwinds, and if its stock is still worth buying.

Reviewing Adobe's growth strategies

Adobe previously established an early-mover's advantage in the creativity software market with its flagship Photoshop, Illustrator, and Premiere Pro products. That "best in breed" reputation kept designers and media professionals firmly locked into its ecosystem.

Over the past decade, Adobe has transformed its desktop-based software into cloud-basedservices. That transition increased the stickiness of its ecosystem, generated stable recurring revenue, and enabled it to expand into adjacent markets with enterprise-oriented cloud services.

During the second quarter, Adobe generated 73% of its revenue from its Digital Media business, which houses its Creative Cloud services and its Document Cloud (Acrobat and Sign) services. It generated 25% of its revenue from its smaller Digital Experience business, which provides enterprise-oriented marketing, e-commerce, analytics, and workflow services.

Why is Adobe's growth cooling off?

Adobe consistently generated more than 20% revenue growth in fiscal 2021, but it gradually lost its momentum in the first half of fiscal 2022.

Data source: Adobe. YOY =Year-over-year. *Excludes an extra week in the prior-year quarter and currency impacts. **Constant currency terms.

Adobe's revised guidance indicates that deceleration will continue throughout the second half of the year. It attributed that slowdown to "summer seasonality" in the third quarter, higher tax rates, a foreign exchange impact of $175 million throughout the second half of the year, and the suspension of its new sales in Russia and Belarus in response to the war in Ukraine.

Earlier this year, Adobe raised its prices for certain Creative Cloud customers for the first time in five years. But during the second quarter, that adjustment generated less than $10 million in fresh revenue. That accounted for just 2% of its net new Digital Media annualized recurring revenue (ARR), and it failed to meaningfully offset its other near-term challenges.

Slipping margins and slowing earnings growth

As Adobe's top-line growth cools off, its gross and operating margins contracted sequentially and year over year in the second quarter.

Data source: Adobe.

Adobe partly attributes that compression to uneven comparisons for its travel and facilities spending in a post-lockdown world, but the aforementioned macroeconomic headwinds will likely exacerbate that pressure throughout the rest of the year.

That ongoing contraction is disappointing since Adobe's cloud-based peer Autodesk (ADSK 0.37%) -- whichfocuses on engineering, design, and media software -- expects its operating margin to expand for the full year even after suspending its operations in Russia.

Autodesk is also growing faster than Adobe. For the current fiscal year, it expects its revenue to rise 13%-15%, and for its adjusted EPS to increase 27%-31%. Meanwhile, Salesforce (CRM 1.05%), which competes against Adobe's Digital Experience cloud, anticipates 20% revenuegrowth this year.

The valuation and verdict

Adobe will likely overcome its near-term challenges, but its stock isn't a screaming bargain at 27 times this year's adjusted EPS, especially when Autodesk trades at a comparable forward price-to-earnings ratio. Therefore, I believe Adobe will remain stuck in neutral until the macroeconomic situation improves. It's not a bad buy right now, but plenty of othertechstocks could generate healthier returns this year.