Adobe Inc – Outlook raised, revenue growth stagnant June 20, 2024 132

PSR Recommendation: REDUCE Status: Maintained
Target Price: 480.00
  • 2Q24 revenue/adj. PATMI was in line with expectations at 49%/50% of our FY24e forecasts. In 2Q24, revenue grew 10% YoY to US$5.3bn led by higher subscription sales for its creative and document management solutions. Adj. PATMI rose 13% YoY to US$2bn on higher operating leverage. 
  • For FY24e, Adobe expects its total revenue to grow by 10% YoY to US$21.45bn (FY23: 10% YoY), taking the midpoint. The company increased its net new Digital Media ARR forecast to US$1.95bn from US$1.9bn driven by subscriber growth and early traction around new product innovations such as Firefly and Acrobat AI assistant. Adj. EPS guidance also raised to US$18.10 from US$17.80 (FY23: US$16.07). 
  • We maintain the REDUCE recommendation but raise our DCF target price to US$480.00 (prev. US$465.00), with an unchanged WACC of 7.3% and a terminal growth rate of 4%. Our FY24e revenue estimates remain unchanged while we nudge higher our adj. PATMI by 1% to account for lower expenses. While Adobe is witnessing strong demand trends for its new generative AI solutions, it needs to demonstrate accelerated revenu​e growth. In addition, the company faces tough competition across its markets by startups like Canva and OpenAI’s DALL-E, which could provide headwinds to Adobe’s growth and monetization plans.












The Positives
+ Net new Digital Media ARR beat guidance. Digital Media segment revenue increased by 11% YoY to US$3.9bn. Net new Digital Media annualized recurring revenue, or ARR, was US$487mn for the quarter, exceeding the US$440mn company guidance, driven by subscriber growth and new product innovations (Express for Business, Firefly services, and Acrobat AI). Within the Digital Media segment, Creative Cloud revenue rose 10% YoY to US$3.1bn, and Document Cloud revenue jumped 19% YoY to US$782mn. The growth was mainly led by continued demand for its photography and video editing applications (Photoshop and Illustrator) as well as PDF and e-signature solutions. Acrobat Web’s free monthly active users grew by 60% YoY driven by an explosion of PDF consumption through Chrome and Edge extensions.

+ Operating margins expanded on higher operating leverage. Operating income grew 16% YoY to US$1.9bn as margins expanded by 180 basis points YoY. The margin improvement was mainly due to top-line upside and continuous improvements in cost efficiencies, as expense growth slowed to 8% YoY (2Q23: 13% YoY). General and Administrative expenses were down 1% YoY. We raise our FY24e adj. PATMI by 2% on higher operating leverage.



The Negative
– Creative Cloud segment faced pricing headwinds. In 2Q24, the net new Creative Cloud annualized recurring revenue dropped by about 9% YoY to US$322mn. We believe the drop is mainly because of tough comparisons as price increases over the last two years has started to roll-off. In addition, Adobe faces increasing competition from startups like Midjourney and OpenAI’s DALL-E, which offer generative AI services similar to Adobe’s Firefly, such as generating images from text prompts.

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