The Numbers
In Q4, Adobe’s revenue increased by 12% YoY (13% in constant currency terms), reaching $5.05 billion. This figure surpassed analysts’ estimates by $30 million. Additionally, the company’s adjusted EPS grew by 19% to $4.27, exceeding expectations by $0.13 per share.
While these headline numbers appeared positive, Adobe’s stock experienced a decline in response to its lackluster guidance and regulatory challenges.
For the full year, Adobe generated 73% of its revenue from its digital media business. This segment includes popular applications like Photoshop, Premiere Pro, Illustrator, and its digital media services such as Creative Cloud. The document-focused Document Cloud, which houses Acrobat and Sign, also contributed to this revenue. The remaining 25% of Adobe’s revenue came from its digital experience segment, offering enterprise-oriented marketing, commerce, and analytics services.
Adobe’s digital media segment exhibited stable growth, compensating for the slower growth of its digital experience business. The latter faced challenges as larger companies reduced their cloud spending due to macroeconomic factors.
Despite no significant layoffs, Adobe optimized its R&D and marketing expenses, leading to an increase in its adjusted operating margin from 45.1% in fiscal 2022 to 45.9% in fiscal 2023. CFO Dan Durn emphasized the company’s commitment to maintaining an adjusted operating margin in the “mid-40s” while expanding investments in new artificial intelligence (AI) services and progressing towards the $20 billion acquisition of Figma.
Reasons Behind Adobe Stock Drop
Investor disappointment stemmed from Adobe’s guidance for fiscal 2024, which fell short of expectations. The company predicts a revenue growth rate of only 10%-11% on a reported basis, lower than the consensus forecast of 12% growth. This outlook suggested that Adobe’s generative AI tools may not have a significant impact on its near-term revenue, despite their potential to enhance the stickiness of its ecosystem and accelerate tasks across enterprise services.
The pending acquisition of Figma, originally anticipated to close this year, faces regulatory challenges in Europe, contributing to market uncertainty.
In fiscal 2024, Adobe expects its adjusted EPS to rise by 10%-12%, slightly exceeding analysts’ forecast of a 10% increase. However, this projection signifies a slowdown compared to the company’s 17% growth in fiscal 2023. Furthermore, it does not incorporate the potential impacts of the Figma deal or the ongoing FTC investigation.
These factors motivated some investors to profit from Adobe’s stock, which had already surged by 86% year-to-date prior to the earnings report. Despite the decline, Adobe’s current stock price of $590 per share, at 33 times forward earnings, remains relatively high.
Heading into 2024, Adobe faces several challenges that may impede its previous stellar performance. The company must navigate the difficulties of meaningfully scaling its generative AI services, handle the intricacies of an FTC investigation, and successfully finalize the Figma acquisition. Although Adobe’s stock is not expected to plummet, it may struggle to outperform the market and justify its premium valuation.