Buy The Dip In Adobe Stock?? | Adobe (ADBE) Q3 Earnings Analysis

Adobe reported their Q3 print after the market closed yesterday and as investors digested this Q3 print Shar slid nearly 8 and a half% on the day coming down to $536 a share as we get into their Q3 print you'll see frankly the numbers look quite good over at Adobe they came in with a double beat what really send shares lower though is the software guidance for the current Q4 we're in so we'll take a look at what this company is now guiding for we'll also take a look at what analysts now expect this company to put up not just for this current Q4 but also for the quarters ahead we'll also take a look at some comments made by analysts and also take a look at comments made by the management team themselves as it relates to monetization of AI and really monetization of their entire product portfolio as we move along in the quarters we'll get into the financials and then hello technical chart pattern you better stick around for this part as maybe as soon as Monday you can log into your Chase or Robin Hood or whatever brokerage you use and place and order for shares of adobe because you're coming back and retesting a long long-term support trend line and maybe shares can rebound from the current level so we'll take a look at it from a technical perspective as well hey guys hope you're doing well there's time to check in with shares of adobe that are again sliding nearly 8% on the day despite being down year to date by close to 10% over the past one year haven't really performed with shares of adobe down 3% significantly underperforming your just Benchmark S&P 500 let alone some other softwares of service names like Microsoft like apple like Google and so on but over the The Last 5 Years still doing relatively good with shares of adobe up close to 92% your forward priced earnings multiple still relatively rich on this one over 30 times and forward earnings multiple consider the fact that this is a high high margin nearly 90% gross margin software as a service business with a ton of recurring Revenue so yeah to some extent you do pay a higher multiple but still 30 times an earnings multiple for the growth rates you're getting on this company might be probably closer to the top end of its valuation range now in terms of their Q3 that was phenomenal as revenues came in at $ 5.41 billion that was good for nearly 11% growth year-over-year beating estimates on Wall Street by a cool $40 million what also beat estimates is the bottom line non-gaap BPS as that came in at $465 estimates were lower by nearly 11 cents so nice beat on both the top and bottom line in terms of non-gaap operating income that came in at nearly $2.5 billion consider the fact that their whole revenues are at $5.4 billion so you're looking at nearly 50% operating margins yeah that's right that's not gross margins that's operating margins that's 50% margins by just running Adobe by paying out your employees paying out your marketing cost paying out your cost of revenues we'll get into the financials but the margins on this company is really really what has me excited as an investor really one of the big reasons why I stay bullish on shares of adobe is because they just have so much control on their margins just gives them a lot of flexibility on what to do with that excess cash flow that they consistently generate in terms of non-gaap net income again $2 billion of non-gaap net income that's off of $5.4 billion of quarterly Revenue just phenomenal margin business again that's why you pay a higher multiple on this because you're getting those strong recurring revenues and phenomenal margins now in terms of remaining performance obligations this is an important number for really any software as a service business you can look at it for Salesforce you can look at it maybe even for like a paler but rpos came in at 18.1 4 billion that is a record for this company so really shows you the pipeline over at Adobe stays robust the demand for their products stays strong and you can continue to expect those Enterprise customers to renew those subscriptions renew their memberships to adobe's suit of products in terms of the most recent quarter they also repurchased a boatload of their common stock as they really don't have any use for that access cash flow so they're putting that towards a buyback now in terms of net new digital media AR annual recurring Revenue that came in higher at nearly half a billion dollar that's an important figure net new ARR basically tells you how much this company's bolstering on in terms of that recurring Revenue again one of the reasons why you pay a premium to this so they bolstered on nearly half a billion dollars just in this most recent quarter that's on a net Edition basis and then total exiting the quarter with digital media ARR of nearly $17 billion again shows you just how sticky this company's products are also how much customers are willing to spend end on products of adobe not just now but also in the near future that's based on the RPO figure in terms of cloud AR that grew up to $3.3 billion and then Creative Cloud AR grew up to $ 13.5 billion so on all cylinders this company is firing and really all of their products as they're embedding AI into their suit of applications they're able to continue to charge more for that growing that annual recurring Revenue now what really sent shares lower though is the guidance so we definitely have to take look at that adobe is guiding for the fourth quarter revenues to come in between 5.5 up to 5.55 billion so again a very tight range this company has a very very good outlook on what their subsequent quarters will look like again one of the reasons why you do pay a higher premium multiple to this is because of how predictable this business is they really know what their revenues will look like over the next 12 months and so that allows them to give you a very very tight guidance range for the upcoming 3 months because they frankly have a very good outlook on their business and so the midpoint of that comes in at $ 5.52 billion that did come in lighter than what analysts on Wall Street were hoping for the midpoint was at $5.6 billion they also came in underneath the midpoint on their EPS as Adobe guided for 463 up to 468 per share the midpoint lying right in there at 467 so now while they did come in with a guidance that was just shy of what Wall Street anticipated it's not a huge Miss that's one thing to note the other thing thing to note is this company does tend to sort of sandbag their guidance they like to come in with a beat on their own guidance they also like to Tamper what Wall Street has in store or expectations for this company for the upcoming quarters just again in order to come in with that consistent beat so I think that's another reason why this company tends to sort of be more conservative in their guidance they want to under promise and then overd deliver and then lastly for this upcoming Q4 they did mention that Cyber Monday is falling in q1 versus last year I believe it fell in Q4 as well so that's some sort of ality differences that you can expect with a software as a service business now as we look ahead to the upcoming quarters first of all for this Q4 analyst on Wall Street have their numbers updated so the midpoint now sitting at 5.54 really where Adobe also guided for right in the range of 5.55 billion that would represent just shy of 10% Top Line growth really that's what you can expect for the upcoming quarters 10 and a half up to 11% you are expected to see that Revenue growth sort of accelerate as we head along up to maybe even as high as 12% so that's really the bull case over at Adobe if you can have those revenues even just marginally by half a% or 1% expect them to tick up or accelerate that can be significantly beneficial to their bottom line as again this company is a high margin software as a service business really very little marginal cost to tack on that additional Revenue dollar so we'll see if they can expect those Revenue additions on the growth side yeah that will bode well for their bottom line as that can outpace the Revenue growth maybe at 11% up as high as 12 if not 14% as we look ahead to maybe four or 5 quarters from now so I think that's the really the bull case for Adobe is if they can continue to accelerate that Revenue growth even just a shade higher than 10% that in my opinion can bode well for the stock now we talked about the guidance one of the reasons the guidance being a bit shy is due to the fact that Cyber Monday is falling in the q1 previously it fell in Q4 they're also expecting and by they I mean some analysts on Wall Street they're expecting fiscal 2025 could be the year of AI monetization now this year we already saw some monetization but the adoption is still early as new users are buying higher price plans you also have a large large segment of existing users really upgrading to their additional AI plans and then you have Enterprises buying Firefly Services which is their AI service and then new products like acrobat AI assistant is being adopted so 2024 fiscal still very early in terms of AI monetization for Adobe and then what they're also seeing is that the analysts have added that gen AI usage limits have not been enforced so far but they believe that could change as early as fiscal 2025 and keep in mind this company just has one more quarter in their fiscal 2024 especially for the higher value gen processes like video like audio 3D and animation and their check suggest that fiscal fourth quarter Enterprise renewals will include a harder push to monetize AI usage and look this estimate or this really Anticipation by an analyst on Wall Street isn't coming out of nowhere in fact the management of Adobe on their conference call yesterday did say in terms of direct monetization they've said in the past that the current model is around a gen AI credits which is where they see monetization going in terms of AI models and then what they plan to do is every subsequent capability they integrate into the tool total credits consumed continues to go up and so what they're planning to do as they move forward is start instituting caps on the AI usage and that's really what this Jeff analyst was saying as well in terms of gen AI usage limits that will eventually be capped and likely Enterprise customers will end up having to pay more in order to use more of those AI features and then in terms of why they haven't done this already is because they really want to have the usage across their base grow over time they have a lot of users that are excited about these AI features they don't want to introduce these AI usage limits so early on so at some point they're going to Institute those caps when they feel the time is right they're also going to consider looking at alternative models and what they've seen with AI assistant on acrobat has been very effective and so they plan to also pursue those on other premium AI plans that will include more things like video and other things so they can likely charge higher for that so I think this is a bullish thesis over at Adobe you'll eventually see this company adopt those gen usage limits which they can likely charge the Enterprise customers more for and a large push towards AI monetization will be expected to see in fiscal 2025 I think that's also one of the reasons why this company can maybe outstrip those Revenue expectations and accelerate those into fiscal 20125 I think that really is an exciting bull case over at Adobe in terms of the financials for this most recent quarter that looks absolutely Stellar as you have nearly $ 5.18 billion of subscription Revenue last year you were closer to 4.6 so they tacked on right around half a billion dollars in terms of the subscription Revenue side your product revenu is staying relatively flat to down year over here keep in mind this is a very very small part of this business and then on top of that Services Revenue also ticking in the wrong direction not something actually you like to see but in my opinion if I had to guess a lot of these services and product revenues likely just mainly drive your subscription revenues similarly your product and services cost also just really help to grow the subscription business so largely they have to give away some parts of their business for free in order to have this extremely high margin subscription business that cost just $400 million to generate nearly $5 billion in Topline Revenue so really what you're paying with Adobe is for this high margin subscription revenue of nearly $5 billion that continues to tack on close to half a billion dollar every quarter and so that leads our gross profit to $4.8 billion again nearly dollar for dooll higher compared to last year as your last year gross profit came in closer to $4.3 billion on a six-month basis pardon me on a 9-month basis similar story as you have gross profit of $14 billion last year you were closer to 122.5 billion so really on that run rate of adding on additional half a billion dollar every quarter compared to last year that's what this company has been on Pace for I think that's what they're expected to continue to be on Pace for in the future in terms of operating expenses this is really where Adobe sees the vast majority of their expenses because yeah that software as a service really doesn't cost a lot to generate but you have to pay your engineers to develop that software you also have to do some pretty good sales and marketing also go to market strategies in order to promote that software that you've created and so R&D taking up relatively fast as you now have a billion dollars in R&D expenses sales and marketing coming in at $1.4 billion slightly higher from same time last year there are controlling GNA expenses and then you also have some acquisition or intangibles they did have to pay nearly a billion dollars earlier this year since that figma acquisition fell through and so that is a fee that likely won't continue to occur in the near future and so your operating income coming in just shy of $2 billion again that's off of $5.4 billion in Top Line revenues we get down to net income of nearly $1.6 billion that's after you pay some income taxes this company is just so steady and so predictable again one of the reasons why you pay a premium in terms of an earnings multiple now from a balance sheet perspective looking all good over at Adobe as you have nearly $7.2 billion sitting on your cash and cash equivalents very similar to what you were sitting at nearly 9 months ago total current assets coming in right around $10.7 billion in terms of liabilities they have nearly $1.5 billion of short-term debt this I believe they picked up sometime in the last three quarters as I believe they probably looking to do a tuck in acquisition that's really the only reason why this company would maybe take on some debt they also have a little bit of long-term debt nearly $4.1 billion so all things considered close to five five and a half billion doar in total debt again balanced out by more than enough cash of $7.2 billion so this company having a net negative debt one of the reasons why I think that figma acquisition falling through actually was probably better for Adobe considering the fact that that acquisition really would have blown up their balance sheet all together terms of cash flows this is really where to get excited about as you have $1.6 billion of net income that translates to nearly $2 billion of operating cash flows as you add-on right around $400 million in stock based compensation so not I'd say something that's out of control over at Adobe but something that they might be able to pull back just a little bit more on to run the business and run the operations just a little bit more lean terms of cash flows from investing activities not a whole lot of capex happens over at Adobe this is a software as a service very asset like business so pretty much all of this $2 billion in operating cash flows translates on to your free cash flows and what do they do with that yeah they buy back nearly $2.5 billion of common stock that's over the last 3 months year ago they bought back a billion dollars in the same quarter and so that $2 billion of free cash flow plus an additional 500 million off of your cash that is what is being used to buy back this common stock so this company really having no use for that cash they don't pay a dividend they don't have a ton of debt that they need to pay down and so you can continue to EXP that buyback while it's not at a huge Pace that incremental buyback certainly does help in terms of dilution also returning some Capital to you the shareholder now as we saw from the fundamentals this business is pretty much as steady as it has ever been very predictable from a technical perspective though you are seeing a decline of close to 8 1 12% on the day and you are very close to testing your uptrend trend line very close to $530 on the nose I think that's a level where you can absolutely step and pick up shares of adobe if this is one you've had in your portfolio for a long time maybe you're sitting on a huge gain that's also a level where you could look to maybe incrementally add to your position certainly don't have to go all out at this point because shares of adobe could break through this level and come back down to the 500s we've seen that in the past and so at this $530 level wouldn't unload a full position but if you are looking to incrementally step in or add to your existing Adobe shares this $530 level certainly could make sense because look you still have a long Runway of growth for this company ahead in the quarters ahead you're expecting that 10% to 11% Topline growth slightly faster bottom line growth You're Expecting those net new additions on the digital media AR side to continue to also grow pretty strongly terms of a resistance level you probably have upper head resistance at the $580 level that's probably a point where you could get rejected with shares of adobe but look you're still a ways away from that and at this current incremental level of 5 $130 you are being supported by this trend line if you're really worried about your Adobe position I'd probably set a stop loss at $500 probably don't want to break through underneath that as you're likely going to come back to these lows at $450 if you do that but in my opinion I think this company can be a pretty good software as a service Cornerstone in your portfolio this is really one of the companies that have a differentiated product assortment one that Microsoft or Google or Amazon really haven't been able to copy yet and I don't think they have any business copying their products anytime soon so I think as the quarters Roll Along Adobe will certainly figure out how to embrace AI they've already began rolling them into their suit of products as they continue to monetize those really well into 20125 you'll continue to see additional net new ARR you'll also have the Enterprise reach that adobe really has they continue to sign new large- scale customers like meta like Google like Amazon and then as AI becomes more regulated I think Adobe is one of the few companies in terms of large language models for text to image or text to video creation will be one of the few companies that can do it right both from a regulatory perspective also from a Content creation perspective as well so some of the reasons why I continue to stay bullish on this name one of the reasons why I think from a valuation perspective as well a 30 times earnings multiple doesn't look overly egregious for this high margin very predictable software as a service business that was my take on shares of a will be one I think you can incrementally add on any major decline including this 8 1 12% drop on the day you can probably log in as early as next week and look to place a buy order for shares of adobe let me know your thoughts on this one in the comment section below as always thanks so much for listening and I'll catch you guys in the next video