The price correction in Adobe (NASDAQ: ADBE) stock experienced over the past two quarters was not unwarranted. The company’s AI prospects aside, the results were solid but failed to show the boost seen in other prominent AI players, including NVIDIA (NASDAQ: NVDA), Micron (NASDAQ: MU), Microsoft (NASDAQ: MSFT), Meta (NASDAQ: META), Alphabet (NASDAQ: GOOGL) and Oracle (NYSE: ORCL). However, the company’s quality and value to investors never wavered, leading to a buying opportunity still in play.
Better-than-expected Q2 results, driven by strength in all segments and product lines, spurred the analysts to raise targets and lead the market higher. Based on the chatter, this stock could rise to retest this year’s highs quickly and then continue to rise and retest the all-time highs by the year’s end. Assuming the subsequent quarters reveal the same strengths as Q1, the trend in analysts' sentiment and the stock price should continue and push this stock to a new all-time high within the next twelve to eighteen months, a gain worth 40% to 50% from the $520 level.
Adobe Surges On Solid Results, Cloud and AI Demand
Adobe had a stellar quarter, setting record revenue with a 10.2% YoY increase driven by strengths in both operating segments, outpacing the consensus estimate by a few dozen basis points. The $5.13 billion in net revenue is driven by an 11% gain in Digital Media offset by a slightly slower 9% growth in Digital Experience. Demand centers on Creative Cloud, Digital Cloud, and Enterprise Cloud solutions, including Premier Pro, Animate, and After Effects.
Client counts and deepening penetration, compounded by pricing efforts, aided the top-line strength. Adobe raised prices in 2023, causing some concern among analysts because its products were already selling at premium prices compared to competitors. The takeaway is that product differentiation and utility offset the price increases; clients are flocking to Adobe because it is the premier product.
Margin news is better. The company’s gross and operating margins improved compared to last year, driving leveraged growth on the bottom line. The operating income is up 16%, the GAAP net income is up 21.5%, and the adjusted net income is up 12.75% compared to the 10% top-line gain. The result is a 23% increase in GAAP EPS and a 14.5% increase in adjusted EPS and positive cash flow despite reinvestment and accelerated share repurchases. Regarding consensus, the $4.48 in adjusted EPS is a dime ahead of the MarketBeat.com consensus and led management to raise guidance.
The guidance is the best news in the report. The company raised its guidance for the year, aligning the revenue target with the consensus estimates and the EPS targets with outperformance. The company expects Q2 and full-year EPS to exceed the analysts' targets, providing a tailwind for the market.
The Analysts Lead Adobe to Record Highs
Analysts trimmed their targets for Adobe early in 2024, but that trend is over. The post-release activity includes an upgrade from JPMorgan Chase to Overweight from Neutral and numerous price target increases. There are no downgrades or price target reductions. Several price target increases are below the consensus, but details include a higher low-end range, a rising consensus estimate, and the bulk of targets above the consensus. Consensus assumes a 35% upside and a retest of the 2024 highs; the bulk of fresh targets assume a range above the consensus.
The technical action is promising. Adobe stock is winding up within a secular-grade triangle pattern and has confirmed support at the middle of the range. This suggests upward movement and a retest of the triangle’s upper limit, if not the range top, which is near $700. Assuming the company continues to perform as expected, a new high is likely.
