Adobe (NASDAQ: ADBE) shares dropped 10% following the company's fiscal Q1 earnings despite it topping analysts' expectations on the top and bottom line. Adobe lowered its full-year revenue forecast due to an adverse impact from lower sales in Belarus and Russia. There are also concerns that increased competition from other companies and open source software is starting to eat into its growth.
Overall, Adobe shares are down by about 40% from their all-time high in November. Even after its recent decline, shares remain quite expensive with a price to sales ratio of 12 and a market cap of over $200 billion. However, it is notable that Adobe has 88% gross margins and 36% profit margins which means that its valuation in terms of its forward P/E looks reasonable at 26.
Still, shares remain priced for growth which explains the stock's harsh reaction to a cut in its forward guidance. Shares are also priced as if the company will retain dominant market share and pricing power in its segments, therefore its earnings reports will be the major factor in determining if shares have permanently topped or if this dip will prove to be a buying opportunity.
Inside the Numbers
In its fiscal Q1, Adobe reported $3.37 per share, slightly higher than analysts' expectations of $3.36 per share. This was a 7% improvement from last year. Revenue was $4.26 billion, beating estimates of $4.23 billion and 9% higher than last year.
The biggest components of revenue growth were Adobe Creative Cloud, Document Cloud and Experience Cloud, and an acceleration in subscription revenues.
Next quarter, Adobe expects $4.36 billion in revenue and earnings of $3.30 per share, both of which came in below expectations. It will be interesting to see if analysts downgrade their expectations for 2022 and 2023. Currently, they see EPS of $13.78 in 2022 and $16.26 in 2023.
Another headwind for high-multiple stocks like Adobe is rising interest rates which means that future cash flows become less attractive. However, one counter is that historically pullbacks of this magnitude in Adobe have proven to be great entry points.