What Happened:
Shares of creative software maker Adobe (NASDAQ:ADBE) fell 10.3% in the pre-market session after the company reported second-quarter earnings results. Its revenue guidance for next quarter (especially Net New Digital Media ARR, which the market watches closely) missed Wall Street's estimates. In addition, remaining performance obligations (RPO - leading revenue indicator) came in slightly below consensus estimates, suggesting that ADBE may face increased pressure to meet its near-term growth targets. Adding to the weakness, free cash flow came in below expectations.
On the other hand, Adobe beat analysts' revenue and EPS expectations during the quarter. Its gross margin also improved. However, the market was likely expecting more. Overall, this was a challenging quarter for the company.
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What is the market telling us:
Adobe’s shares are very volatile and over the last year have had 5 moves greater than 5%. But moves this big are very rare even for Adobe and that is indicating to us that this news had a significant impact on the market’s perception of the business.
The biggest move we wrote about over the last year was 3 months ago, when the stock gained 17% on the news that the company reported a “beat and raise” quarter. First-quarter earnings results beat analysts' revenue, remaining performance obligations (RPO – leading revenue indicator), and EPS expectations. These beats were driven by massive outperformance in its net new Digital Media ARR (annual recurring revenue), which clocked in at $487 million (vs estimates of $434 million).
Thanks to the strong results, Adobe upgraded its full-year net new Digital Media ARR and EPS guidance, sending the stock price higher. Its revenue guidance for next quarter missed Wall Street's estimates, but that didn't matter too much because the market cares most about its digital media segment.
Overall, this was a great quarter that put a big dent in the bear argument that ADBE’s best days are behind it due to increased competition.
Adobe is down 8.3% since the beginning of the year, and at $532.09 per share it is trading 16.2% below its 52-week high of $634.76 from February 2024. Investors who bought $1,000 worth of Adobe’s shares 5 years ago would now be looking at an investment worth $1,911.
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