Disillusioned growth investors are starting to get excited.
Shares of software company Adobe (ADBE 14.55%) skyrocketed on Friday after the company reported financial results for its fiscal second quarter of 2024. As of 10:30 a.m. ET, Adobe stock was up 14% — that’s a big deal for a company that’s valued at well over $200 billion.
Beating expectations and calming nerves
Adobe generated Q2 revenue of $5.31 billion, which was up 10% year over year. This beat the high end of management’s guidance by a hair. And on the bottom line, management said it was going to have earnings per share (EPS) of $3.35 to $3.40. But here, too, the company’s financial results exceeded expectations by reporting EPS of $3.49.
J.P. Morgan analyst Mark Murphy gave some context in his note to investors, saying that Adobe investors were in the “trough of disillusionment,” according to The Fly. To Murphy’s point, the company’s top-line growth has been more modest in recent years compared to what investors are more used to, as the chart below shows.
ADBE Revenue (Quarterly YoY Growth) data by YCharts. Note that chart does not reflect Adobe’s Q2 financial results.
Investors have been disappointed but Adobe’s Q2 outperformance lifted spirits. Moreover, analysts (including Murphy) are raising their price targets for the stock, with many citing coming catalysts from artificial intelligence (AI) applications.
Are tailwinds about to blow?
Adobe is a strong business and it’s doing fine. But I’m a little surprised to see analysts expecting stronger growth in the back half of its fiscal 2024 thanks to AI. The midpoint of the company’s full-year 2024 revenue guidance is $21.45 billion, implying revenue of almost $11 billion in the second half of the year. That’s only a 10% increase from the second half of its fiscal 2023.
Don’t misunderstand: 10% growth is great for Adobe. But this doesn’t represent an AI-boosted acceleration to growth — it’s almost exactly the same as its growth in the first half of the year.
Therefore, Adobe shareholders should be happy that the business is still quite strong. But I’d try to keep expectations on growth grounded.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.
