Way to Profit, Adobe!
The market's attitude to Adobe stocks is finally beginning to synchronize with my own opinion, I described more than three months ago, in mid-March. My ideas on the company's undervaluation were essentially correct but premature. It happened to be too early for purchasing shares of Adobe immediately after a 13.5% decline. The price persistently tried to bounce for more than two weeks, then it dropped by another 10% in April and May. The narrative transformed into positive only at the end of last week, following the latest quarterly report. The share price gapped from nearly $460 to above $530 in one night after the report, adding more than 15% to follow the creative software developer's positive revision of its total sales forecast for 2024. The owner of Photoshop, Illustrator, Acrobat Reader and other well-known software that also invented the PDF format for graphic files is now focused on Adobe Creative Cloud services, betting on growing demand for artificial intelligence features. Many investment houses responded by raising their "fair values" for Adobe after its CEOs shifted to higher estimates for the next quarter guidance, including a revenue range of $5.33 billion to $5.38 billion, and $4.50 to $4.55 for EPS (equity per share). The last quarter's revenue increased by 11% YoY in constant currency to $5.31 billion. So, the forecast update was rather solid, resulting to the full year potential of $21.40 billion to $21.50 billion in revenue (from previous numbers announced between $21.30 billion and $21.50 billion) and of $18.00 to $18.20 in EPS (from $17.60 to $18.00 only). Adobe also raised its new digital media subscription metric from $1.90 billion to $1.95 billion.
Consumption for enterprise customers is good and may grow further because of Adobe’s generative AI solution, named Firefly. This web application is widening the door for new customers, offering "new ways to ideate, create, and communicate while significantly improving creative workflows", according to the software description. Adobe Acrobat also has AI-powered advancements. That's probably why the operating margin reached 46.0%, compared with 45.3% in the same season of 2023.
Yet, there is also a fresh reason for Adobe share price to be stalled at new higher levels, and that is the US governmental trade commission's lawsuit to the company for allegedly hiding some hefty termination fees (in the fine print, or behind text boxes and hyperlinks), concerning its most popular "annual paid monthly" subscription plan, while making it difficult for subscribers to cancel. It is said that early termination fees amounted to up to 50% of the remaining payments when consumers tried to cancel subscriptions in their first year, while Adobe also "forced" subscribers, who want to cancel online to navigate through numerous pages, while some clients, who tried cancelling by phone were disconnected and then had to repeat their claims to multiple representatives. Accusations in setting the sign-up trap for its clients and violating consumer protection laws needs at least some time, and maybe money, to be settled down.
Meanwhile, there is nothing new in the matter itself, as a similar lawsuit was filed against Amazon, about one year ago, where the US government accused Amazon of making it too hard for its customers to cancel their Prime memberships. And you are right that nothing principally bad happened with mid-term prospects in Amazon shares. So, I do not think any serious damage would be done to Adobe as well. Therefore, personally I feel that any price decline in the stock would only give a better opportunity to buy for those who refrained from doing so in the three previous months. At least, my buy positions, which I opened in mid-March have already begun to bring profit.
By the way, a very similar technical pattern was formed on Adobe charts in early summer 2023, with a reverse break up through the previously (in September 2022), temporary and falsely broken support level (a bit below $350). After that, the stock successfully recovered and set its new all-time high soon. I'm not insinuating anything, I'm just speculating!
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