Take a pass on Adobe, Brian Madden says

The business is solid and the growth prospects are there but now isn’t the time to be buying into a name like Adobe Systems (Adobe Systems Stock Quote, Charts, News, Analysts, Financials NASDAQ:ADBE). That’s according to portfolio manager Brian Madden, who thinks the market is just playing too rough with tech stocks at the moment.

“This is a company we had owned in our growth and momentum portfolios earlier in the year and sold,” said Madden, chief investment officer for First Avenue Investment Counsel, who spoke on BNN Bloomberg on Thursday.

“[Adobe] is certainly a leader in its category,” he said. “The recurring subscription-based revenue is something the market values very highly. But at the end of the day, it’s a global software behemoth and a growth stock at a time when the market is turning sour on these leaders of the last cycle, these tech and growth names, and pivoting more towards basic needs, commodities and value stocks and that sort of thing.”

Makers of popular software tools such as Photoshop, Illustrator and Dreamweaver, Adobe shares have slid over the past two trading days as the market reacts to the software company’s fiscal second quarter 2022 earnings for the period ended June 3, delivered on Thursday. ADBE managed slight beats of analysts’ top and bottom line estimates and posted 14 per cent year-over-year revenue growth, but investors seem to have focused instead on the lowered full fiscal year guidance from management which went from the previously-given revenue and EPS forecasts of $17.90 billion and $13.70 per share, respectively, to now $17.65 billion and $13.50 per share, respectively. (All figures in US dollars.)

Foreign exchange headwinds as well as geo-political concerns over the war in Ukraine were cited by management as reasons for the more muted forecast. But the company remains resolute on the growth runway for its various software lines, citing strength in the so-called creator economy and the ongoing digital transformation across all industries.

“The digital economy runs on Adobe’s tools and platforms,” said Shantanu Narayen, Chairman and CEO, in the second quarter conference call. “Customers from individuals and small businesses to the largest enterprises are using our products to unleash their creativity, accelerate document productivity, and deliver personalized customer experiences. Digital experiences from the apps on our devices to the digital documents we consume, Edit and Sign, to the personalized online shopping experiences is made possible by Adobe.”

Adobe hit $4.39 billion in Q2 revenue, up 14 per cent year-over-year or up 15 per cent in constant currency, with adjusted earnings per share of $3.35. The consensus calls were for revenue of $4.34 billion and EPS of $3.31 per share. Adobe saw its Digital Media segment, which includes its Creative Cloud and Document Cloud businesses, grow by 15 per cent to $3.20 billion, while its Digital Experience segment for marketing and commerce was up 17 per cent to $1.10 billion.

“We are winning in our established businesses and seeing significant momentum in new categories from content authoring for a broad base of creators to PDF functionality on the web to the leading real-time customer data platform for global enterprises,” said Narayen in the second quarter press release.

Even with the solid growth profile, Adobe’s share price has suffered over the past half-year, falling with the rest of the tech and growth stocks to a huge 47 per cent drop in value between its mid-November high of about $688 per share to now around $360. 

The drought will end some day for Adobe and the tech sector, but Madden says it’s a mug’s game as to when that’ll be.

“We’re under-weight technology in our portfolios and pivoting more to the value part of the continuum, and those real growth stalwarts and leaders that we have in the portfolio, we’ve kept them in modest weights and [Adobe] didn’t really make the cut and compete for capital among some of the other names we have,” Madden said.

“There’ll be a time to come back to it. We don’t think it’s today, though,” he said.

As to a target price on a name like Adobe, Madden says it’s not his practice to give them.

“One of the things makes my skin crawl and I’m very loath to do is to pinpoint a price target with a dollar and cents, two decimal points of accuracy and a specific point in time,” Madden said. “I know that is a very common practice in the business especially among brokerage analysts. We don’t do it here. We look at the facts and evaluate the opportunities as we see them and as we foresee them playing out.”