Adobe’s stock (NASDAQ: ADBE) experienced a significant jump of 14.5% on June 14th, outperforming the S&P 500 index. This increase followed the company’s announcement of its second-quarter FY2024 results, which exceeded both street estimates and the company’s financial guidance. Currently trading around $525, ADBE stock is considered to be undervalued by around 13% according to Trefis, with a fair value estimated at $601.
While ADBE stock has seen little change in recent months, the performance has been volatile compared to the S&P 500 index. Returns for the stock were 13% in 2021, -41% in 2022, and 77% in 2023, underperforming the index in the first two years. ADBE’s stock performance in recent years has shown challenges in consistently outperforming the S&P 500, a trend seen across various tech heavyweights. On the other hand, Trefis’ High-Quality Portfolio, composed of 30 stocks, has consistently outperformed the S&P 500 each year over the same period.
In the second quarter of FY2024, Adobe reported total revenues of $5.31 billion, up 10% year-over-year. This growth was primarily driven by a 11% increase in the digital media segment and a 9% rise in the digital experience segment. The digital media unit saw gains in the creative cloud and document cloud categories, with digital Media ARR reaching $16.25 billion. Additionally, the operating margin improved to 35.5%, resulting in a 21% year-over-year increase in net income to $1.57 billion.
For the first two quarters of FY2024, Adobe’s top line grew 11% year-over-year to $10.5 billion, fueled by a 12% increase in digital media revenues. However, the operating margin declined to 26.6% due to a $1 billion acquisition termination fee incurred in the first quarter, leading to a 14% year-over-year decrease in net income to $2.2 billion. Looking ahead, ADBE expects third-quarter revenues and earnings to remain between $5.33-$5.38 billion and $3.45-$3.50 respectively, with estimated revenues reaching $21.43 billion for FY2024.
Overall, Adobe’s net income margin is projected to decline in the year, resulting in a net income of $5.57 billion and an annual GAAP EPS of $12.38. With a P/E multiple just below 49x, the company’s valuation is expected to reach $601. As the company navigates through the current uncertain macroeconomic environment, characterized by high oil prices and elevated interest rates, investors will be closely watching to see if Adobe can maintain its strong performance and potential for future growth.
