Shares of Adobe were poised to open at their lowest point in two years Friday after the software provider's softer-than-expected guidance prompted a series of price target reductions up and down Wall Street.
Second-quarter results for Adobe (ticker: ADBE) were " far better than feared," wrote Deutsche Bank analyst Brad Zelnick, and most other analysts agreed. The company posted revenue of $4.39 billion, ahead of consensus estimates for $4.34 billion. Earnings per share were $3.35, a nickel ahead of the company's guidance and 4 cents above Wall Street expectations.
The problem, however, lies in the guidance. Adobe sees revenue of $4.43 billion for the third quarter, with adjusted profit of $3.33 a share. Analysts were expecting $4.51 billion in revenue and profit of $3.40. For the full year, the company is now forecasting adjusted earnings of $13.50 a share, down from a prior estimate of $13.70 before, on $17.65 billion in revenue, down from a previous forecast of $17.9 billion.
Adobe stock was down 3.4% to $352.78 in premarket trading on Friday. The stock hasn't closed below that level since May 4, 2020. The shares have dropped 36% this year, and 34% over the course of the last 12 months.
"We believe the shares are already reflecting a fairly high degree of skepticism towards the [fiscal year] guide, but until Adobe gets back into 'beat/raise' mode, it is going to be difficult to shift sentiment in a more positive direction, especially given the macro backdrop," wrote Evercore ISI analyst Kirk Materne in a research note. Materne lowered his price target for the stock to $475 from $650, while maintaining an Outperform rating.
Oppenhimer's Brian Schwartz also reduced his price target to $400 from $560, saying that the shares will likely remain under pressure in the short term, given "an inconsistent execution trend in the reported results." That's likely to continue until investors are more comfortable that declines in operating margin and annual recurring revenue for the company's digital media segment are transitional, he added. Schwartz retained a bullish Outperform rating on the stock.
Adobe said its outlook was impacted by several factors, including the war in Ukraine, negative exchange rate effects, higher effective tax rates and lower-than-expected tax benefits. Chief Financial Officer Dan Durn said the company's full outlook saw a $75 million hit from the decision to exit Russia and Ukraine. Given these macroeconomic challenges, Deutsche Bank's Zelnick believes that the company's guidance approach was "prudent" and improves Adobe's negotiating posture in large enterprise deals.
"We don't believe any software company is immune to macro deceleration , though we do believe Adobe should fare better than most given its leverage to a more digital future, consistent innovation, pricing power, solid execution, and category leadership," Zelnick wrote.
Zelnick reiterated a Buy rating, but proceeded to cut his price target to $500 from $575 to reflect lower estimates.
Matthew Swanson, analyst at RBC Capital Markets, was one of few analysts that did not update his price target in the wake of earnings, according to FactSet. Swanson maintained a $500 price target and Outperform rating, adding that management's guidance was "prudently conservative." The first half of the year was positive for Adobe, Swanson added, with net-new digital media annual recurring revenue coming in 5% above consensus, and digital experience showing resilience despite near-term e-commerce headwinds .
Inded, even with the lowered price targets, most analysts remain optimistic about the stock, with 84% rating it at a Buy-equivalent and 16% rating it a Hold , according to FactSet.