Adobe Stock Experiences a 12% Dip Following its Earnings Report
Adobe (ADBE dropping 12.4% by 10:30 a.m. ET on Thursday) experienced a significant plunge, despite outperforming earnings in its Q4 2024 financial report released the previous night.
Analysts had anticipated Adobe would post earnings of $4.67 per share on revenues of $5.5 billion. Yet, Adobe outdid expectations, reporting earnings of $4.81 per share, and grossing over $5.6 billion in revenues.
Adobe's Q4 Performance
However, not everything was rosy. Adobe managed a 11% year-on-year increase in sales, contributing to a record-breaking fiscal year for the company (sales also rose 11% year-on-year for the year).
The reported $4.81 quarterly profit, however, turned out to be a non-GAAP figure. According to generally accepted accounting principles (GAAP), the actual earnings were considerably lower – only $3.79 per share.
Despite this, there was a 17% increase in quarterly profit, boosting full-year net income to $12.36 per share, representing a 4.6% year-on-year growth.
Moreover, Adobe demonstrated impressiveness in cash generation, announcing a quarterly free cash flow of $2.9 billion, marking an 85% rise year-on-year. For fiscal 2024, Adobe reported creating $7.9 billion in positive free cash flow, according to S&P Global Market Intelligence – a 14% increase over the previous year.
Should you Invest in Adobe Stock?
Surprisingly, this equates to a 46% increase in actual cash profits compared to Adobe's reported net income for fiscal 2024, resulting in a reducing 26.9 price-to-free cash flow ratio. Although Adobe stock appears pricey with a 39.3x P/E ratio, when measured against cash profits, Adobe seems comparatively cheap.
Given the modest earnings growth, an investor might typically say no. However, with a 26.9 P/FCF divided by Adobe's 14% FCF growth rate, we have a P/FCF/growth ratio of 1.9 – nearly twice the rate required to label a stock 'cheap'. Yet, despite an overpriced market, Adobe appears more reasonably priced than many other tech stocks. If you insist on investing in tech stocks, at the very least, Adobe remains a reliable performer.
Despite Adobe's strong financial performance, such as a 14% increase in free cash flow and a substantial reduction in the price-to-free cash flow ratio, its stock price still dipped by 12.4%, potentially indicating a discrepancy between financial metrics and investor sentiment. For individuals considering investing in finance, assessing both the financial data and market sentiment is crucial when it comes to making informed decisions about investing in stocks like Adobe.
