What happened

Shares of software maker Adobe (ADBE 2.95%) were up 3.8% in 11:15 a.m. EST trading after beating earnings last night.

Expected to earn $3.50 per share in adjusted (i.e. pro forma) profit on fiscal Q4 sales of $4.53 billion, Adobe nailed its revenue target -- and earned $3.60 per share instead.  

So what

Adobe grew its Q4 sales 10% year over year (YOY), and that growth would have been 14% but for unfavorable changes in currency exchange rates. On the other hand, Adobe's earnings news wasn't quite as great as they first appeared. While Q4 profits did exceed expectations, when calculated according to generally accepted accounting principles (GAAP), profits per share were not the $3.60 noted above (remember, that was a pro forma number) but only $2.53 per share -- and in fact down about 1.5% YOY.  

But Adobe shareholders were willing to forgive that misstep in light of Adobe's strong performance in 2022 as a whole. For the full fiscal year, Adobe set records for revenue, operating profit, and operating cash flow as well. Sales grew 12% in comparison to fiscal 2021 -- $17.6 billion in total. GAAP net earnings were $10.10 per share, and while not up quite 12% (actually, earnings grew less than 1%), at least they went up, not down.

Now what

And Adobe intends to do even better in fiscal 2023. Issuing new guidance for the full year, Adobe predicted sales will grow at least 8.5%, and probably more, to a range of from $19.1 billion to $19.3 billion, with GAAP profits up between 6.4% and 9.4% -- potentially rising to $11.05 per diluted share.

On the plus side, these estimates -- assuming Adobe hits them -- imply significantly greater earnings growth in 2023 than the company enjoyed in fiscal 2022. Coupled with the Q4 "earnings beat," this probably explains why investors are rewarding Adobe stock on a red day for the market Friday -- but don't forget the minus side.

The minus side of Adobe's forecast is that even if the company maxes out its earnings forecast next year, at a current share price of $340 and change, investors are now paying more than 30 times forward earnings for a stock that's promising only single-digit revenue and profits growth. That seems a pretty rich multiple to me, working out to a PEG ratio of more than 3.0. For that matter, even if Adobe's growth accelerates post-2023 (as, admittedly, analysts forecast it will), then projection for 15% long-term annualized earnings growth doesn't seem to justify a 30 P/E on this stock.

Even if it's encouraging to see Adobe shares rise on a red day for the market, I wouldn't be a buyer at these prices.