Adobe's Shares Tanked But Its Business Is as Healthy as Ever

Last Thursday, Adobe Inc ADBE shares dropped 10% as investors punished the company for lower guidance that the Chairman and CEO Shantanu Narayen blamed on timing and foreign exchange, assuring that the business is as healthy as it has ever been. But its stock had its second-worst day in a decade, tanking 10%, which was only topped by the 15% fall last March when COVID-19 started its relentless march across the globe.

Fiscal 2021 fourth quarter

For the three months ended on December 3rd, revenue grew 20% YoY to $4.11 billion fueled by 21% growth in the company's digital media segment. Adjusted earnings per share (EPS) were up 14% to $3.20. Both figures slightly outperformed guidance, wrapping up 2021 as a great year in which the creative software maker succeeded to forget about its fall from the beginning of the pandemic that was simply caused by uncertainty.

Unfavorable foreign currency terms

For months now, the U.S. dollar has been strengthening against various foreign currencies. According to FactSet, the U.S. contributes slightly above 52% to Adobe's revenue.

An additional fact to consider

The undergoing fiscal first quarter will last for 13 weeks this year, as opposed to fiscal 2021's 14 weeks as its 2021 calendar included an additional week. The creative software leader is returning to a 52-week fiscal year.

The reason for concern?

Over the past year, Adobe has made two acquisitions: Workfront, which is a marketing workflow management outfit and Frame.io, a video collaboration platform. Considering the hype around digital content creation, many investors were clearly expecting these recent additions to contribute more to Adobe's own organic growth.

Fiscal first quarter and full-year guidance

Adobe expects revenue for the February quarter to amount to $4.23 billion, below Wall Street's $4.34 billion expectation that Refinitiv reported. As for full-year revenue, it is guided at $17.9 billion, also below Wall Street's expectations of $18.16 billion.

Competitors

Adobe is still the champion of creative software so there is no reason to doubt its track record of steady revenue and growing profitability will continue well into 2022.

But the space is crowded with Autodesk Inc ADSK, Unity Software Inc U, Salesforce.com Inc CRM, DocuSign Inc DOCU, and even NVIDIA Corporation NVDA with the recent commercial launch of its Omniverse software.

The verdict

Perhaps Adobe's days as a 20%-plus growth enterprise are indeed over, but this also seemed possible right before the pandemic back in 2019, before its trajectory accelerated again. Despite the creative software maker's weaker-than-expected guidance due to unfavorable foreign exchange terms, Adobe is as strong as ever because the creative economy runs on its software with creative workers having becoming more important for the global economy than ever before. Speaking to CNBC's Jim Cramer, Narayen was confident in the company's future, emphasizing that weaker-than-expected guidance is by no means a red flag for Adobe's business which is as healthy as ever.

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