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Adobe’s sinking stock and bright business prospects diverge — investors should take note

Adobe Inc., by all accounts, has had a tremendous year. But it is always amazing the difference a day can make, especially in this era of wild stock market volatility. 

Following Federal Reserve Chairman Jerome Powell’s comments Wednesday, it appeared that the persistent pressure on technology and growth names was subsiding. However, the gains from his relatively dovish and positive commentary were wiped out Thursday. 

On that day, Adobe ADBE, -2.45% reported its fiscal fourth-quarter results before the bell, and investors didn’t like what they read. However, the market’s irrational exuberance and unrealistic expectations provide a material disconnect from eras in which strong earnings and guidance may have been followed with a jump in share price. Instead, a 10% sell-off was the reaction to what I thought was overall a strong quarter and a humble yet encouraging road ahead.

Adobe also hosted its financial analyst day. CEO Shantanu Narayen kicked off the event by providing his remarks on the current year and some of his vision for the new fiscal year. A number of his top executives joined Narayen to give a deeper look into its financial performance and its three major business units: Creative Cloud, Document Cloud and Experience Cloud. 

Adobe’s three main businesses rally

Adobe saw record revenue for the full year and the fourth quarter — $15.79 billion and $4.11 billion, respectively — and representing growth of 23% for the year and 20% for the quarter. Double-digit growth and record revenue hardly feel like a reason for investors to grow wary. 

Perhaps more importantly, the business has grown nicely across its three clouds. Creative Cloud saw 19% year-over-year growth in the most recent quarter, Document Cloud had 29% growth, and Experience Cloud jumped 23%.

Perhaps more importantly, the annual recurring revenue in all three business units continues to grow by solid double-digits. With annual recurring revenue (ARR) growth coveted across cloud and technology names, the continued substantial growth of Adobe’s recurring revenue should serve as an encouraging data point for robust growth based on customer stability. 

Connected to key trends 

Adobe is a company that finds itself well-placed in the digitization of everything. Its three businesses encompass the tools for creatives, e-commerce and data connoisseurs looking to build and execute the next generation of digital experiences. This provides a runway to compete and grow against the backdrop of a $200 billion-plus total addressable market (TAM) by 2024 for all things digital. As digital content consumption continues to explode and every company seeks to be a digital company, Adobe solutions are well-positioned to address the needs of enterprises and individuals. 

Furthermore, the current portfolio of digital solutions places Adobe at the center of the continued digitization of everything, and in the pole position to compete for market leadership in areas like 3D, immersive and the increasingly popular metaverse. Many newly minted NFTs are created using Adobe’s Creative Cloud suite and then sold on NFT marketplaces like Rarible.

Beyond the creative component of Adobe’s business, which comprises $63 billion in TAM by 2024, the company is still the most renowned software company globally for the digitalization of documents using its popular Document Cloud. Yet, perhaps deserving even more attention is one of its more exciting and less understood businesses that provides the most significant market opportunity, its Experience Cloud. 

The Experience Cloud is a high-growth business with a rapidly expanding TAM, which will jump from $85 billion in 2023 to $110 billion by 2024. The Experience Cloud provides enterprises with an analytics platform that focuses on the customer journey, marketing workflows, and data and audience insights tools.

Adobe finds itself a strong competitor and in some cases strategic partner to organizations utilizing customer data platforms and CRM solutions from the likes of Microsoft MSFT, -0.66%, Salesforce CRM, -0.46% and Oracle ORCL, -6.76%, to name a few. While there are overlaps, Adobe is incredibly well-positioned for its leading capabilities to utilize digital customer experience data from the web and mobile to help enterprises optimize customer journeys. This unique set of capabilities often positions Adobe as part of a software stack for enterprises — even if other leading software coexists to manage system of record or other portions of the customer analytics and marketing stack. 

Looking ahead to 2022 

Much of the chatter as to why Adobe stumbled so hard following its earnings results was tied to the company’s soft guidance. While we have certainly seen some companies’ guidance met with disdain, the fact of the matter is that Adobe’s guidance was only a smidge light of expectations. I attribute a good part of the selling pressure on Adobe to the overall market direction since Wednesday, which saw a plethora of high-flying tech names like Nvidia NVDA, -1.11%, Tesla TSLA, +0.60% and AMD AMD, -0.69% all down significantly. 

With its stock down 19% from its 52-week high, which came in November, it is hard not to like Adobe here. While the market turbulence will likely continue for some time, macroeconomic uncertainties such as the persistence of Covid-19, rising interest rates, increased government spending and red-hot inflation data will continue to create a nervy environment for investors.

Adobe is well-positioned in three key segments that have made it critical to the digital transformation of businesses worldwide. With record revenue, robust growth in all of its segments, increasing recurring revenue, and strong liquidity and strategies to return capital to shareholders, Adobe looks like a winner in the long run, even if it had to take the “L” for a day. 

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising, and/or consulting to Adobe, Qualcomm, Intel, Nvidia and dozens of other companies in the tech and digital industries. Neither he nor his firm holds any equity positions with any companies cited. Follow him on Twitter @danielnewmanUV.

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