ADBE Quick Take

After Adobe(ADBE) reached a high of $688 before the holiday season in 2021, investors got away from the stock and shares have sold down around the $400 range, or a drop of ~70% from the peak. We will go through potential reasons shares have gotten hit and whether this might present an attractive entry point for potential investors. 

Growth Stocks are in the “Penalty Box”: Perhaps the largest and most clear factor that a business who seems to be firing on all cylinders is the broader sell-off of Growth Stocks. This is thanks to fears of the Federal Reserve moving towards more restrictive monetary policy in the form of higher interest rates. Higher interest rates typically bode trouble for stocks that are given high market multiples(P/E Ratio). However we feel that this frenzy in the equity growth market will pass and that rates will remain near historic lows even though it is likely that monetary policy becomes slightly more hawkish(interest rate hikes). Think about the cost of borrowing/debt being more expensive for high growth companies but not all growth companies are the same. 

Priced for Earnings Perfection: The stock was an extremely popular trade given the strong business dynamics but when a stock is in such high favor and assigned a good multiple they are expected to execute flawlessly. ADBE reported earnings in mid-December and while delivering well on revenue growth and earnings, the company missed expectations on annual recurring revenue(ARR) which is an important metric for software as a service companies(SaaS). Guidance for 2022 was also relatively conservative causing a sell-off of up to 10% the day after the earnings call. While this is disappointing and some value should have come off the name, the sell-off seems overdone. The stock remains a high grower with 20% revenue growth on the quarter and deserves a higher multiple. The stock had been on a good run so it was priced for a blow out quarter leading to the value creation. 

GenVest Take: We maintain our conviction in ADBE as a long term buy and feel that shares are now attractively priced given the recent sell-off. While it might take some time for growth names to come back in favor, this business is a market leader in a field that has quite the wind at its back in digital marketing, cloud creation and digital experiences. The company remains well on pace to grow profit margins and cross-sell its solutions. Positive business momentum will return to the stock in the form of earnings growth as this plays out over the next 6-12 months. With the valuation now being much more reasonable ABDE is a strong buy and we are rounding up positions within our GenVest Quality Growth Fund.