What do you do when one of the most actively followed stocks on the planet reports an earnings beat, and half the analysts who follow the stock downgrade it anyway? What do you do when that stock crashes on good news?
That’s the situation facing Adobe (NASDAQ: ADBE) investors today. The PDF company was expected to report $4.97 per share in earnings last night, on less than $5.7 billion in revenue. Adobe instead reported $5.08 per share in profit, and more than $5.7 billion in revenue.
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Nearly a dozen (according to The Fly) of the three dozen analysts who follow Adobe (according to S&P Global Market Intelligence) promptly lowered their price targets, driving Adobe stock down 11.1% through 9:45 a.m. ET.
Adobe reported $5.71 billion sales for the first quarter of fiscal 2025, ended Feb. 28, up 10% year over year. The company’s $5.08-per-share profit, however, was non-GAAP. Earnings as calculated according to generally accepted accounting principles (GAAP) were only $4.14. Still, that was more than 3 times GAAP earnings in Q1 2024.
Not only that, but Adobe reported $2.5 billion in positive free cash flow for the quarter, twice last year’s $1.2 billion, and 36% more than reported net income. By these metrics, the quarter looked exceptionally strong, and earnings quality at Adobe was very good.
So why is everyone from Bank of America to TD Cowen cutting price targets on Adobe today? And why is the stock plummeting? In a word: guidance.
Adobe forecast weaker than expected sales and earnings for both Q2 2025 and for the full year. Management sees 2025 earnings coming in between $20.20 and $20.50 per share (non-GAAP), and GAAP earnings could be as low as $15.80. This would value Adobe stock at about 25 times current year earnings.
But here’s the thing: $15.80 per share this year would equal a 28% earnings growth rate. On a 25 P/E stock, that seems cheap to me. Adobe’s not a sell folks. It’s a buy.
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Bank of America is an advertising partner of Motley Fool Money. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Bank of America. The Motley Fool has a disclosure policy.
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