Adobe Pre-earnings Analysis

Adobe Pre-earnings Analysis

Chart done on daily timeframe. One of the most prominent creative software companies is set to report earnings next month and analysts are eager to see what they bring in Q1 of 2024. With excitement around artificial intelligence overtaking the market, investors will be watching for Adobe’s comments on their new Generative AI products. Historically, the company has adapted very well to technological change, but the rise of Generative AI can pose a threat to Adobe’s products. Consumers no longer need sophisticated skills to operate Adobe’s Creative Suites in order to produce/edit images and videos, they can simply use other AI software and type in exactly what they want to reach the final product. 

Adobe also recently terminated a 20B dollar deal to purchase Figma, which is a very popular web application in the collaborative design space. The decision to end the deal saved them 20B, but investors were looking forward to the additional $400M (and growing rapidly) in revenue, 90% of which would’ve been profits for Adobe. 

Despite gruesome competition, Adobe has steadily grown by double digit percentage points year over year, reaching 19.37B in revenue in 2023. Their balance sheet has a positive ratio of 2:1 in assets vs. liabilities, and their free cash flow is strong at around 7B. The biggest outlier for the company is their hefty valuation, which trades at a price to earnings multiple of 46, about three times the healthy average. The reality of the current market however doesn’t seem to think twice about valuations, especially for anything involved in AI. Companies that mention artificial intelligence during their earnings have seen strongly positive reactions, and given the fact that Adobe is a leader in their space likely sets them up for a push towards their 52 week highs. 

Option chain analysis:

Adobe is set to report earnings on March 14th, a day before monthly contracts expire. The options expiring on the 15th currently reflect an implied volatility reading of 51%, which translates to about a $50.00 move. If Adobe can speak positively about their new Generative AI products and meet expectations then it’ll likely move to reach a level around 650.00. An earnings miss, or a market downturn can lead them towards their critical 497.00 support.