Wall Street has pushed Adobe's (ADBE 0.89%) stock lower in 2022, lumping the software specialist in with other tech stocks that are expected to post much weaker growth and earnings results in the next year. That premise had some merit to it, given that Adobe is projecting that its sales growth will slow to below 10% in its fiscal 2023 compared to 12% in the fiscal year that just closed.
But some positive signs about Adobe's business shone through in its mid-December earnings update. Let's look at the biggest green flags in that report, each of which should help the company power strong returns for long-term investors.
Green flag 1: Adobe is hitting its targets
It is true that Adobe's expansion rate is slowing. Revenue grew by just 10% in its fiscal Q4, which ended on Dec. 2, compared to a 13% gain in fiscal Q3. Growth for the fiscal year fell to 14% (after factoring in currency exchange shifts) compared to the 23% growth it achieved in 2021.
But Adobe's fiscal Q4 performance was slightly better than expected. Management predicted back in September that sales for the period would land at about $4.52 billion, and the company edged past that to $4.53 billion. Landing so close to executives' short-term target shows that demand is holding up even as economic growth is slowing, and that Adobe has a good grasp on market trends.
Green flag 2: It's getting more efficient
Adobe's finances made even bigger strides this past year. The company easily beat management's earnings forecast for fiscal 2022, and operating cash flow landed at $7.84 billion, translating into 45% of sales.
ADBE Cash from Operations (TTM) data by YCharts.
Cost-cutting measures contributed to that result, but the bigger factor was an efficient overall selling approach that relies heavily on the software-as-a-service model. "Our strategy ... [is] making us one of the most innovative, diversified, and profitable software companies in the world," said CEO Shantanu Narayen on the Q4 earnings call.
Green flag 3: Management sees more growth ahead
Adobe's 2023 outlook implies another year of similarly solid gains. Revenue should rise to between $19.1 billion and $19.3 billion, executives said, which means growth of about 9%. That expansion pace would translate to 13% higher sales after accounting for currency exchange rate shifts.
Earnings should jump to between $10.75 per share and $11.05 per share from $10.10 per share this past fiscal year. Cash flow has been so strong lately that management is now expecting to pay down debt more aggressively, reducing its interest expenses and removing some pressure on its bottom line.
Investors should also be thrilled to see strong growth in Adobe's subscription services heading into what could be an economic slowdown or recession in 2023. These commitments from a wide range of customers, including consumers and large enterprises, suggest stable sales trends ahead. And even if the market takes a sharper turn lower, Adobe's excellent cash position gives it a valuable buffer against needing dramatic cost cuts.
Shareholders might not be pleased to see Adobe projecting a second straight year of slowing growth. But a deeper look at the company reveals a business that's winning market share in an attractive industry while boosting its key financial metrics. Those wins signal a bright future, even if the next few quarters are volatile.
