Adobe Inc. seems like just the kind of technology stock that would provide shelter in a market storm — a huge, profitable, decades-old company with strong brands and double-digit revenue growth, selling at the cheapest valuation in almost a decade.
Turns out the price is still high even for some one-time Adobe bulls, while news that is about shell out $20 billion to buy software company Figma Inc. is not helping either.
Two firms, Mizuho Securities and BMO Capital Markets, downgraded the stock this week, while Citigroup Inc. cut its fourth-quarter estimates. That was before the company announced what may mark the biggest ever takeover of a private software company, to be funded partly in cash and partly in stock, and sending its own shares down as much as 18%. The stock fell by the most since March 2020, with analysts opining that the deal seems “extremely expensive.”
The downgrades also preceded Adobe’s quarterly results, which were released Thursday morning.
Bloomberg Intelligence wrote that the deal appears “extremely expensive given the annual recurring revenue of the target company is only $200 million,” although it “may improve the overall functionality of Adobe’s Creative Cloud business.”
Adobe, the maker of Photoshop photo-editing software and the Acrobat document-creation program, has been hampered by the U.S. dollar index near a 20-year high and surging interest rates, representing headwinds to overseas sales and stock multiples. The Federal Reserve’s rate increases to fight inflation threaten to push the economy into a recession, weighing on demand and resulting in longer times for clients to sign deals.
For Mizuho, this is a more difficult environment than it expected, with large deals potentially becoming less prevalent. There’s a risk that the company cuts its guidance for the current quarter, analyst Gregg Moskowitz wrote this week.
“If we see earnings growth explode, which we haven’t yet seen in Adobe, then that bullish catalyst would help lift the stock,” said Adam Sarhan, chief executive officer of 50 Park Investments. “But in the meantime, valuations are getting compressed because the Fed is in a tightening mode and yields are going through the roof.”
Adobe, with a market value of about $145 billion, has a long history of enriching shareholders: Over the past two decades, the stock has returned 20 percent a year, about double the return of the S&P 500 Index. And analysts broadly still see Adobe as a reliable grower, with double-digit revenue increases anticipated for the next several years.
BMO Capital Markets is less sure on that front. The firm moved to the equivalent of a neutral view on the shares, citing “uncertainty about the durability of growth” for the Creative Cloud business, which includes graphic design and video editing software products. Creative Cloud accounted for more than 60 percent of Adobe’s 2021 revenue.
The tempering of bullishness follows Adobe’s previous report, from mid-June, when it cut its revenue forecast. Morgan Stanley downgraded the stock in the wake of those results, warning a slowing growth profile.
Sarhan sees more volatility ahead for Adobe and other software stocks, but said they were starting to jump onto his radar.
“It’s starting to look very attractive, and while we’re not quite there yet, I think the stars are beginning to align for value investors,” he said.
While the market has recently offered some positive technical signals, a key measure for long-term momentum remains decidedly negative. The Nasdaq 100 hasn’t closed above its 200-day moving average since early April, and that multimonth stretch represents its longest such streak since one that ended in 2009. “Although the Nasdaq 100 has been beneath the 200-day for several months, we’ve seen periods that have lasted much longer,” said Ryan Detrick, chief market strategist at Carson Group. “As long as it is down here, caution is warranted.” The index would have to rise more than 10 percent to reach the closely watched level.