Adobe stock price has moved sideways in the past few days as investors wait for its earnings, which will shed more color on its progress on artificial intelligence. ADBE was trading at $415 on Friday, up by 25% from its lowest point this year.
Adobe earnings ahead
Adobe, the company behind popular software like Photoshop, InDesign, and Lightroom, has underperformed its top peers in the past few years.
Its stock is barely moved in the past five years, while the S&P 500 Index has jumped by 113% and Microsoft has soared by 150% in the same period.
The company’s underperformance is mostly because its growth has slowed, and its investments in artificial intelligence are yet to pay off. Most notably, companies like Figma and Canva have disrupted some of its business.
Therefore, Adobe stock price will be in the spotlight this week as it publishes its quarterly results.
Data compiled by Yahoo Finance shows that the average revenue will be $5.8 billion, a 9.2% increase from the same period last year. In contrast, other top software companies like Microsoft and ServiceNow are growing by double digits.
The average earnings estimate is $4.97, up from $4.48 last year. The highest estimate is that Adobe’s EPS will be $3.9. They also expect the company’s annual revenue to be about $23.4 billion, representing a 9.1% annual growth.
While Adobe issued a weak forward guidance, there are odds that the company’s actual numbers will be better than expected. It has a long record of beating analysts estimates.
The most recent results showed that Adobe’s revenue jumped by 10% in the first quarter to $5.71 billion.
Its cash flow from operations rose to $2.48 billion, while the company continues repurchasing its stock. It bought 7 million shares, bringing its outstanding shares to 435 million, down from 479 million in 2021.
Share repurchases help a company boost its stock by increasing its earnings per share.
ADBE is a cheap stock
Valuation metrics show that Adobe is a fairly cheap company. It has a forward price-to-earnings ratio of 20, a few points lower than the sector median of 22.
Its forward EV-to-EBITDA ratio of 15 is also lower than other companies in the software industry.
The most popular way to value a SaaS company like Adobe is known as the rule-of-40, which looks at its growth and margins. In its case, it has a trailing twelve-month revenue growth of 10.5% and a net income margin of 31%, giving it a multiple of 41.
When using free cash flow, the company has a rule-of-40 metric of 47%, making it highly undervalued. Adobe is cheap because of its slow growth and the fact that it has not succeeded in monetizing its AI tools.
Adobe stock price analysis
The daily chart shows that the ADBE share price has bounced back in the past few months. It has moved above the upper side of the descending channel that connects the highest swing since September last year.
The stock has also moved above the 50-day and 100-day Exponential Moving Averages (EMA). Also, the Relative Strength Index (RSI) and the MACD have pointed upwards.
Therefore, the stock will likely have a bullish breakout, with the next point to watch being at $500. However, a drop below $400 is possible, especially if its financial results come short of estimates.
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