Adobe Reiterates Outlook for 2023, Reports Solid Q4 Earnings

Adobe Stock at a Glance

• Current Morningstar Fair Value Estimate: $425
• Adobe Stock Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Stable

Adobe Earnings Update

Wide-moat Adobe (ADBE) reported solid fourth-quarter results, including revenue and non-GAAP operating profits that were basically in line with our model. The firm also reiterated its complete outlook for full-year 2023. Overall, we consider this a win for Adobe and investors, although with the exception of easing currency pressure, we are not ready to assume the rest of our software coverage will follow a similar favorable pattern next month. Management also noted the Figma acquisition is under review by various regulatory bodies around the world and is progressing as expected. We continue to believe the deal closes in fiscal 2023. Given no changes to guidance and a relatively stable environment, we are maintaining our fair value estimate of $425 and view shares as attractive for long-term investors, although we do see heightened sensitivity to a possible slowdown within the advertising arena in the event of a possible recession in 2023.

Revenue results support our long-term forecast. Fourth-quarter revenue grew 14% year over year in constant currency (10% as reported) to $4.525 billion, in line with guidance and FactSet consensus. Digital media revenue grew 14% year over year while digital experience, or DX, sales grew 16% year over year, with the former slightly shy of our model while the latter was slightly ahead. Adobe added $576 million in net new annual recurring revenue, or ARR, compared with guidance of $550 million. The firm noted generally solid demand across products and geographies, with no material deterioration in buying patterns. We are impressed by the company’s ability to attract new users via Adobe Express, and then convert them to full subscribers and think positive commentary on the call will help assuage investor concerns.

Margin performance is in line with our long-term model. Non-GAAP operating margin was 44.7%, compared with 45.2% a year ago and 44.1% last quarter, representing a continued return to more normal prelockdown operating conditions.