The buzz of the week? Adobe (NASDAQ:ADBE) – the software company known for developing PDF and for its flagship product, Photoshop released its earnings last week. Over the previous year, Adobe holders have seen their prices fluctuate, in part due to the AI disruption. Adobe’s release of the Firefly lured investors as AI could help Photoshop users generatively fill areas. Then, OpenAI released Sora. Although Sora has not been released fully, its ability to create text-to-video images worries Adobe investors. This led to a 1Y beta of approximately 1.8. Last week’s earnings gave a more in-depth view into the future of Adobe and AI.
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Revenue increased 2.4% to $5.3bn, NI back up to $1.5bn following a drop last year due to the failed acquisition of Figma, and EPS up to $3.5 with no dividends. The stock currently trades at a forward P/E of 29.24x, P/B of 15.8x, and EV/Rev of 11.42x, nothing too extraordinary given the premium given to software companies. The company currently sits on $8bn of cash has $6bn of debt, unlevered FCF of $6.5bn and changes in NWC back in the positive digits. RoE holds steady at 34.2%, margins at 88.2%, D/E of 41%, and can substantially cover the interest on their debt, all LTM. Yet, Adobe’s share has underperformed the Nasdaq YTD, nearly (9)% down since January where the Nasdaq has risen 19.8%. Its fundamentals look steady, yet why has the share price fallen? The AI Disruption.
See, software and tech companies like Adobe are massively susceptible to the changing conditions in the rapidly evolving world of tech. The current craze is AI, and the failure of a company like Adobe to capture this trend can mean investors become wary of their future performance. To note, the share price constitutes what investors value the current and future state of the company. If Adobe doesn’t capture and keep up with the AI trend, investors will start discounting that future aspect.
The company’s segments have performed double-digit growth YoY, have won customers such as Amazon and BT, have raised their segment’s ARR target, and have introduced AI to enhance“productivity and customer engagement”. The company is doing well but fails to convince its investors that it can keep up with the continuously evolving AI.
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