Adobe's (ADBE +2.70%) stock price soared nearly 15% on June 14 after the cloud software giant posted its latest earnings report. For the second quarter of fiscal 2024, which ended on May 31, its revenue increased 10% year over year to $5.31 billion and exceeded analysts' expectations by $20 million. Its adjusted earnings grew 15% to $4.48 per share and cleared the consensus forecast by $0.09.
That earnings beat allayed some bearish concerns regarding Adobe's macro, competitive, and regulatory challenges, but its stock remains down about 12% for the year. Its new artificial intelligence (AI) tools also failed to impress bulls or significantly boost its revenue, and it was left out in the cold as other AI-oriented stocks rallied.
Image source: Getty Images.
But could Adobe regain its momentum and eventually become more valuable than Apple (AAPL 0.85%) -- which recently set a new record high after it unveiled its new generative AI tools -- by the end of the decade? To decide, let's review Adobe's business model, its recent and long-term challenges, and its valuations.
Why is Adobe's growth cooling off?
From fiscal 2013 to fiscal 2020 (which ended Nov. 27, 2020), Adobe's revenue grew at a compound annual growth rate (CAGR) of 18%. Most of that growth was driven by the transformation of its desktop-based applications into cloud-based services -- which were stickier, easier to scale, and generated predictable recurring revenue.
But over the past two years, Adobe experienced a significant slowdown as the growth of its digital media (73% of its fiscal 2023 revenue) and digital experience (25%) divisions cooled off:
|
Metric |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|
|
Digital media revenue growth |
25% |
11% |
11% |
|
Digital experience revenue growth |
24% |
14% |
11% |
|
Total revenue growth |
23% |
12% |
10% |
Data source: Adobe. FY = fiscal year.
Adobe's digital media division houses its Creative and Document Clouds. This segment struggled with macro challenges for the media industry, tough currency headwinds, and competition from newer challengers like Figma and Canva. Adobe previously tried to buy Figma for $20 billion to dominate the software user interface (UI) and user experience (UX) markets, but regulatory pressure forced it to abandon the deal last December. The digital experience division, which handles its other enterprise-facing cloud services, also struggled as macro headwinds drove more companies to rein in their spending.
Adobe is trying to drive more customers to its generative AI platform Firefly, which can help its customers create photos, videos, and 3D models with text-based prompts. Firefly can also be used to accelerate other tasks across the company's cloud-based services. However, Firefly hasn't meaningfully boosted Adobe's sales over the past year.
NASDAQ: ADBE
Key Data Points
What could happen to Adobe over the next six years?
For fiscal 2024, Adobe expects its revenue to rise 10%-11% and its adjusted earnings per share (EPS) to grow 12%-13%. Those estimates suggest its core businesses will stabilize as the macro environment improves.
At $525 per share, Adobe's stock trades at 29 times its adjusted EPS estimate for fiscal 2024. That valuation is reasonable -- but not cheap -- relative to its cloud software peers. Microsoft, which is growing at a faster rate, trades at 33 times forward earnings. Salesforce, which is growing more slowly, has a forward multiple of 23.
Assuming Adobe maintains its forward price-to-earnings ratio and grows its adjusted EPS at a CAGR of 12% from fiscal 2023 to fiscal 2030, its stock price could nearly double to $1,030 by the final year. That rally would boost its market cap to about $440 billion -- but that's still tiny compared to Apple's current valuation of $3.3 trillion.
While Apple faces some near-term challenges, I believe it will continue growing through the end of the decade; it will be rolling out new products, expanding its services ecosystem, and plowing more of its cash into buybacks, new investments, and big acquisitions. In other words, it's unlikely Adobe will come close to matching Apple's market cap by 2030.
What Adobe's investors should focus on instead
Instead of wondering if Adobe will ever become a multitrillion-dollar tech titan like Apple, investors should focus on its three more pressing challenges: It needs to stay ahead of its smaller competitors in the creative software market, prove that Firefly can ignite its nascent efforts in generative AI, and resolve an ongoing probe by the U.S. Federal Trade Commission (FTC) of its strict subscription cancellation policies.
If Adobe fails to check those three boxes, its growth could decelerate, and it could be revalued as a mature tech stock. That's why I sold my shares of Adobe earlier this year -- and why I think it will continue to underperform other top tech stocks like Apple and Microsoft over the next few quarters.
