On Monday, Citi updated its outlook on Adobe Inc. (NASDAQ: NASDAQ:ADBE), reducing the price target from the previous $616.00 to $590.00 while keeping a Neutral rating on the stock. The adjustment comes as Adobe faces mixed sentiment in the lead-up to its fourth fiscal quarter report, due in just two days.
Currently trading at $552.96, InvestingPro analysis indicates the stock is fairly valued. The company's third-quarter results prompted concerns due to a weaker-than-expected outlook, suggesting potential revenue challenges ahead, compounded by broader economic and competitive pressures.
Adobe's stock performance has lagged behind its large-cap counterparts by approximately 40% over the past three months, with a year-to-date return of -7.31%. Despite these challenges, the company maintains impressive gross profit margins of 88.66% and generated $6.55 billion in free cash flow over the last twelve months.
This backdrop has set investor expectations relatively low for the company's fiscal year 2025 net new annual recurring revenue (NNARR), with projections aligning with the subdued demand for digital media annual recurring revenue (DM ARR) growth, anticipated to be around 11%.
Citi's maintained Neutral rating reflects an expectation that Adobe's share price and valuation will likely stay within a certain range. This outlook is influenced by Adobe's current strategy, which focuses on the expansion of Generative AI (GenAI) technologies rather than immediate monetization. Additionally, the firm notes fading price tailwinds and increasing competitive challenges as Adobe moves into fiscal year 2025.
The revised price target of $590 factors in lowered earnings estimates for Adobe, albeit slightly offset by higher regression inputs. This new target implies a 24.4x enterprise value to free cash flow (EV/FCF) multiple, which contrasts with the 30x multiple observed among Adobe's large-cap peers. The stock currently trades at a P/E ratio of 46.45x and an EV/EBITDA multiple of 29.75x.
The assessment by Citi signals cautious investor sentiment as Adobe navigates through a period of strategic shifts and market headwinds.For deeper insights into Adobe's valuation and growth prospects, InvestingPro subscribers can access the comprehensive Pro Research Report, which includes detailed analysis of the company's financial health, competitive position, and growth trajectory.
In other recent news, Adobe Inc. has been the focus of various analysts' attention. BMO Capital Markets has raised its price target for Adobe to $600, maintaining an Outperform rating. The firm anticipates Adobe will exceed its fourth-quarter net new Annualized Recurring Revenue (ARR) guidance of $550 million, especially in the Document Cloud segment. RBC Capital also kept its Outperform rating on Adobe, expecting a favorable outcome from the company's fourth-quarter earnings report.
Piper Sandler maintained its Overweight rating on Adobe, citing robust subscription growth trends and potential for significant earnings per share growth. DA Davidson also kept its Buy rating, focusing on Adobe's potential to enhance its margin profile through the impact of artificial intelligence.
Morgan Stanley (NYSE:MS) also maintained its Overweight rating, emphasizing Adobe's unique advantage to capitalize on the medium-term potential of Generative AI. Adobe's recent unveiling of the Firefly Video Model and updates to flagship products like Photoshop and Illustrator, along with a global AI literacy initiative, were also noted.
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