5. Adobe (NASDAQ:ADBE)
Year to Date Return: -14.02%
Number of Hedge Fund Holders: 107
Adobe (NASDAQ:ADBE) became the first software company to adopt a subscription model for its solutions. While the company has enjoyed tremendous success in offering products, services, and solutions that enable individuals, teams, and enterprises to create, publish, and promote content, it finds itself at a crossroads.
The stock is down by about 14.02% for the year, affirming its status as one of the worst-performing blue chip stocks in 2024. The underperformance comes against concerns about the company’s long-term prospects.
Adobe (NASDAQ:ADBE)’s Digital Media division, which includes its flagship Photoshop and Illustrator, accounts for almost three-quarters of its total revenue. The remainder is derived from its enterprise clients’ Digital Experience services. Over the previous two fiscal years, both business divisions struggled with slower sales growth.
The company’s practice of charging prorated penalties to users who terminate their subscriptions after the first 14 days has been the subject of a Federal Trade Commission (FTC) investigation. The FTC could make its cloud services less sticky by prohibiting its cancellation fees, while Adobe acknowledged that it might have to pay “significant monetary costs or penalties” to resolve that investigation.
Amid the struggles, Adobe (NASDAQ:ADBE) delivered solid third-quarter results, delivering $5.41 billion in revenue, an 11% increase from the previous year. Adobe’s earnings-per-share (EPS) totalled $3.76 as opposed to a range of $3.45 to $3.50.
Nevertheless, Investors had an issue with Adobe’s guidance for the year as it fell short of Wall Street’s expectations. While Wall Street was expecting roughly $5.61 billion, Adobe (NASDAQ:ADBE) projected between $5.5 billion and $5.55 billion for the fourth quarter. This would suggest growth of 8.9% to 9.9% annually, which some investors might find a little slow.
In terms of these valuation metrics, Adobe is costly as it trades at a price-to-earnings multiple of 24. However, it is marginally below its historical averages on both counts.
Polen Global Growth Strategy stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter:
“With Adobe Inc. (NASDAQ:ADBE), in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
