Investors needn’t worry about Adobe’s (NASDAQ: ADBE) near-term price action because of the longer-term value gains derived from its quality. Adobe investors should instead focus on the bullish longer-term price action. The chart of monthly prices shows this leading SaaS provider that monetizes AI today is in a solid uptrend. The uptrend is marked by high volatility in 2020-2022, resulting from the pandemic bubble and then again over the past eighteen months driven by the AI bubble. Still, it is an uptrend winding up within a narrowing consolidation range, preparing to retest the top of the range and likely break to new highs, only not soon. It will probably be sometime in early to mid-2025.
The long-term action is biased toward the upside because of rising support levels, support above the consolidation range’s mid-point, and bullish signals in the stochastic and MACD that suggest an additional upside is coming. The question is how high Adobe can build its wall of worry, and the answer is significantly higher, but investors should be wary of volatility. The Q3 results were uninspiring and may result in a retest of support levels before the price action moves up to retest for resistance at the top of the range.
Adobe Falls on Tepid Guidance: Pay Attention to the Cash Flow
Adobe had a solid quarter but failed to inspire with its guidance. The $5.41 billion in net revenue is up 11% compared to last year, outpacing the consensus estimate by 70 basis points on strength in all its operating divisions. Digital media, including Creative Cloud and Document Cloud, grew by 11%, with a 10% increase in creative and an 18% increase in document. Digital Experience also grew by 10%, and another year of low double-digit gains is expected systemwide in 2025.
The problem for the price action following the Q3 release is the guidance for Q4. The guidance is tepid relative to analysts' consensus, as reported by MarketBeat, and shows a sequential slowing in the business. The salient point is that Adobe continues to grow despite its large size; it is the leading digital experience creation platform today and generates robust cash flow. Cash flow in Q3 topped $2 billion or 37% of revenue and allowed for significant value building regarding the balance sheet and shareholders.
Adobe’s earnings power is solid, driving a substantial capital return program consisting entirely of share repurchases. The buybacks in Q3 reduced the count by 6.9% on average and will likely continue at a robust pace for the foreseeable future. The balance sheet highlights include decreased assets and increased liability, resulting in a decline in shareholder equity, but the increase in treasury shares more than offsets the loss. The takeaway is that Adobe’s balance sheet hints at burnt value, but its value burned in favor of shareholders, which will help support the stock’s uptrend over time.
Adobe Stock Is Priced to Perfection
The analyst activity following Adobe’s Q3 results is mixed but shows a deepening conviction the stock is priced to perfection. The half-dozen revisions released within the first day of the release include a downgrade to Neutral, three price target reductions offset by two price target increases, and a maintained target above consensus. The revisions amount to a consensus of $607 compared to the broader consensus of $606, suggesting Adobe stock may fall today but will likely rebound soon and continue to move sideways near current levels until something changes in the outlook.
Adobe’s price action fell more than 8% after the release and shows resistance near the top of the narrowing range, but it is still above critical support targets and more likely to move sideways than not.
Critical support is near $500 and may be retested before the year’s end, presenting an even more opportune entry point if it is reached. If not, investors should expect ADBE stock to drift sideways for the next few months to three quarters unless there are surprises in the forthcoming quarterly reports.
