Adobe Stock (NASDAQ:ADBE): Q2 Results Crush Market Concerns

Adobe (NASDAQ:ADBE) stock has recorded a strong post-earnings rally, with its Fiscal Q2 report crushing market concerns. The creative software giant delivered another stellar quarter, sustaining strong double-digit growth in both revenue and earnings. The report effectively crushed recent investor worries, which regarded potential setbacks from AI advancements and a trending wave of subscription cancellations. Its numbers effectively disproved both issues. Thus, I remain bullish on ADBE stock.

ADBE stock has gained 7.7% in the past year after its rebound.

What Was Keeping ADBE Stock Sentiment Depressed?

To understand the significance of Adobe’s Q2 report, it’s important to consider the persistent market concerns that have kept the stock sentiment subdued for some time. As illustrated in the price chart, Adobe struggled significantly to gain bullish momentum until recently despite a robust tech sector rally. This can be attributed primarily to two key factors: worries surrounding its AI strategy impacting investor confidence and further tension over a potentially increasing rate of subscription cancellations.

Let’s take a deeper look at each issue.

Concerns Over AI Developments

The most significant worry Adobe investors have recently grappled with is the profound implications of AI on the company’s investment outlook. The remarkable advancements we’ve witnessed over the past year or so raise the question of whether this technology could render Adobe’s software suite obsolete. Take, for instance, OpenAI’s Sora, which showcases astonishingly detailed text-to-video capabilities, vividly bringing imaginations to life with unprecedented simplicity.

Concerns Over Subscription Cancellations

The second and more recent concern that Adobe investors have had to face lately is a viral trend on social media where Adobe subscribers are seen attacking the company for unfair practices. Particularly, Adobe has reportedly made it deliberately hard for customers to cancel their subscriptions to products like Photoshop, effectively “trapping users” into expensive contracts. In some cases, Adobe would demand that users pay a fee to cancel their subscription.

This issue has escalated to the point where the Federal Trade Commission (FTC) launched a case against Adobe. This turmoil clearly made some investors think that the company may face a surge in cancellations as unhappy customers seek alternatives as a form of retaliation.

Q2 Results: Growth Defies Market Worries

As I hinted in the introduction, Adobe’s Q2 results defied both stated market worries. Revenues for the quarter grew by 11% in constant currency to a record $5.31 billion. Growth in the quarter was driven by strong performance across all three main segments: Digital Media, Digital Experience, and Document Cloud. In fact, management cited strong demand for Acrobat subscriptions, new user acquisition, AI Assistant monetization, and robust subscription growth in Creative Cloud and enterprise solutions.

These figures, along with management’s commentary, clearly contradict the overly negative sentiment that has been impacting Adobe’s stock price in recent months. Despite a trend of cancellations on social media, Adobe’s Creative Suite remains in high demand. Additionally, no comprehensive video AI product from competitors is commercially available, while Adobe’s own impressive AI solutions, such as Adobe Firefly, are available and actively driving further growth.

Adobe Stock Remains Reasonably Valued

Besides strong revenue growth, Adobe’s earnings also grew notably in its second-quarter report. Along with shares remaining notably below highs, I believe that Adobe remains reasonably valued. Earnings per share (EPS) came in at $4.48 on an adjusted basis, up 15% year-over-year. Based on Adobe’s first-half-of-the-year performance and ongoing momentum, Wall Street expects that adjusted EPS for the full year will land close to $18.16. This implies a forward P/E ratio of 29x at the stock’s current price levels.

Given Adobe’s robust double-digit revenue growth and mid-teens earnings growth, combined with its many appealing qualities—such as steady recurring cash flows and a significant competitive advantage in the creative software market—the current valuation appears highly attractive. Additionally, the valuation is notably lower than Adobe’s historical highs, suggesting a stronger-than-average margin of safety.

Is ADBE Stock a Buy, According to Analysts?

Checking Wall Street’s view on the stock, Adobe features a Moderate Buy consensus rating based on 20 Buys, five Holds, and two Sell recommendations assigned in the past three months. At $611.88, the average ADBE stock forecast implies a 16.1% upside potential.

If you’re wondering which analyst you should follow if you want to buy and sell ADBE stock, the most profitable analyst covering the stock (on a one-year timeframe) is Derrick Wood from TD Cowen, with an average return of 25.78% per rating and a 74% success rate. Click on the image below to learn more.

The Takeaway

In conclusion, Adobe’s Q2 results effectively addressed investor concerns, showcasing robust growth and generally very sturdy demand for its creative suite. With strong numbers across all divisions and progress in developing AI solutions, Adobe seems to be adapting to reality fast. Finally, despite the post-earnings share rebound, Adobe stock seems to be trading at an attractive valuation, reinforcing my bullish outlook on its future prospects.

Disclosure