Adobe Shares Drops On Poor Guidance, But Sell-Side Analysts Less Worried

Shares of Adobe Inc. ADBE were dropping Friday after the cloud software company issued disappointing second-quarter guidance, but sell-side analysts seemed less concerned.

Reactions were mixed, with a couple reminding investors that Adobe’s core business is fine and continued growth is expected. The new outlook did lead to one downgrade, however, from KeyBanc.

The pullback came despite a strong first-quarter earnings report Thursday in which Adobe reported top- and bottom-line results ahead of expectations. Adobe’s first-quarter earnings of $1.71 per share beat Wall Street estimates by about a dime. The company reported record revenue of $2.6 billion, also beating analysts’ expectations.

Adobe’s expectations of second-quarter earnings of $1.77 per share were below Street expectations for $1.88, and guidance for revenue of $2.7 billion was slightly below the consensus expectation of $2.72 billion.

The Analysts

• KeyBanc Capital Markets analyst Brent Bracelin downgraded Adobe from Overweight to Sector Weight.
• Wells Fargo analyst Philip Winslow reiterated a Market Perform rating on the stock with a price target of $250.
• Cannacord Genuity’s Richard Davis maintained a Buy rating on the stock but increased his price target from $290 to $300.
• Guggenheim’s Ken Wong maintained a Neutral rating on Adobe with a $275 price target.
• Wedbush’s Daniel Ives maintained his Neutral rating and $270 price target.

Adobe's stock was down 4.3 percent Friday morning to $256.11 per share.

The Theses

KeyBanc

Bracelin noted Adobe’s strong performance in the most quarter, but downgraded to balance risk-reward.

“We maintain a favorable view on ADBE as a marquee cloud investment with high margins and healthy growth but see few near-term catalysts to justify further multiple expansion on healthy but decelerating annual recurring revenue growth,” Bracelin wrote in a note.

Wells Fargo

While Adobe reported solid results across its entire portfolio, investor expectations have also increased. Winslow said he questions whether “good enough” growth will actually be good enough for investors.

Cannacord Genuity

“Will Adobe lose its footing?” asked Davis. “Perhaps, but we believe that is very unlikely within at least a 3-year horizon.”

Davis believes Adobe has the strongest franchise in Marketing Tech.

Guggenheim

Wong noted there’s likely some confusion among investors about Adobe’s results because of a change in accounting that adds noise to full-year outlook after what was a solid start to the year.

Wong also reminded investors the company believes revenue from its Digital Experience business is expected to grow 25 percent with two recently-acquired companies, open-source e-commerce platform Magento and software company Marketo operating “at or above plan.”

Wedbush

Ives asked investors not to lose sight of strong execution by Adobe management, which, he said, “engineered a legendary model transition from its original license roots to a subscription-based business that has really been flawless.” That management strength should continue to serve the company well.

“In our opinion the company still has some fuel left in the tank heading into the rest of 2019 as new customer acquisitions across all its offerings saw global strength again this quarter and the emerging markets continue to grow while Creative Cloud enterprise deployments remain robust," Ives wrote.

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