Adobe (ADBE +2.64%) investors were quick to press the panic button after the company released fiscal 2024 first-quarter results (for the quarter ending March 1, 2024) on March 14, as the company's guidance failed to match Wall Street's expectations.
Shares of the company were down 14% in a single session following the report, bringing an end to its rally, which has been fueled by optimism around its artificial intelligence (AI)-focused products. In all, Adobe stock has lost 15% of its value in 2024 as of this writing.
Let's take a closer look at Adobe's quarterly report and check if its recent pullback is an opportunity to buy a potential AI winner.
Adobe's disappointing sales outlook shook investor confidence
Adobe's fiscal Q1 revenue increased 12% year over year in constant-currency terms to $5.18 billion, while adjusted earnings jumped 18% year over year to $4.48 per share. Analysts would have settled for $4.38 per share in earnings on $5.14 billion in revenue, but a strong showing from the company's digital-media segment allowed it to trump consensus estimates.
However, Adobe failed to round off its quarterly report with solid guidance. The company expects revenue of $5.25 billion to $5.3 billion in the current quarter, missing the consensus estimate of $5.31 billion. The projected earnings range of $4.35 per share to $4.40 per share is in line with Wall Street's expectations of $4.38 per share.
Though Adobe's guidance indicates that its revenue would increase almost 10% year over year, while earnings would increase 12%, investors were expecting a stronger AI-driven lift. That's not surprising as Adobe has been hyping up its generative AI credentials over the past year.
Even on its latest earnings conference call, Adobe management spent considerable time explaining how it is integrating generative AI across its broad portfolio of digital media and marketing tools. CEO Shantanu Narayen remarked that Adobe is "driving strong usage, value and demand for our AI solutions across all customer segments."
NASDAQ: ADBE
Key Data Points
However, Adobe's weaker-than-expected guidance has investors worried about the growing competition that the company could be facing. HSBC analysts believe that the advent of AI dented Adobe's moat with rivals such as Stability AI and Midjourney vying for a share of the digital-marketing and creative-software space. This is probably the reason why Adobe's AI monetization isn't turning out to be as fast as Wall Street was anticipating.
The company is expecting $440 million in net-new annual recurring revenue (ARR) from its digital-media segment in the current quarter. That's below the $469 million analyst estimate and would represent a slowdown from $470 million in net-new ARR it reported during the same period last year. Given that Adobe stock was trading at expensive valuations before going into its earnings report, the company's lackluster outlook was enough to send its shares plunging.
ADBE PE Ratio data by YCharts.
Should investors buy the stock now?
As the chart above indicates, Adobe continues to command rich-valuation multiples even now. Its price-to-sales ratio of 12 is higher than the Nasdaq-100 Technology Sector index's average of 7.3. The trailing-earnings multiple of 44 also represents a premium to the index's reading of 31.
Adobe needed to deliver a better outlook to justify these multiples. However, it has failed on that front and remains expensive when compared to other AI stocks that are delivering faster growth. Also, Adobe's annual-earnings growth is forecasted to remain between 12% and 15% over the next three years from fiscal 2023's reading of $16.07 per share.
ADBE EPS Estimates for Current Fiscal Year data by YCharts.
For comparison, other AI software plays such as Palantir and C3.ai are estimated to grow at much faster rates that could help them justify their valuations. As such, investors would do well to stay away from Adobe stock as the company needs to accelerate the monetization of its AI tools so that it can grow at a much faster pace and justify the premium that the stock market has given it.
