Riddle me this, how do you shock investors into a two-day selling frenzy vaporizing (-20%) off your share price and (-30%) off your market cap just after releasing great earnings? Answer, by announcing a cash and stock acquisition paying 50X sales ($20 billion) for a company with $400 million ARR in revenues… and do it a day ahead of scheduled earnings (taking investors completely off guard) into a fear-driven market sell-off in the wake of a technology bear market. Digital cloud creative software company Adobe (NASDAQ:ADBE) has just perfected the art of the faceplant for its investors. The $20 billion acquisition of Figma overshadowed an otherwise good Q3 2022 performance. While its latest earnings performance was impressive, growth momentum is clearly slowing as evidenced by the 12.6% top line growth for Q3 2022 versus 21% in the year-ago period. The Company also faced nasty FX headwinds from the strong U.S. dollar like Salesforce (NYSE:CRM) and Oracle (NYSE:ORCL). However, investors are more concerned over the acquisition of Figma signaling that it could be a defensive play born out of desperation despite revenues hitting all-time highs. Investors were clearly taken by surprise on the news and the following stock collapse. Could this be an incredible buying opportunity, or the start of a painful valuation reset for shares of Adobe?
Earnings Were Good Until…
On Sept. 15, 2022, Adobe released its fiscal third-quarter 2022 results for the quarter ended August 2022. The Company reported earnings-per-share (EPS) profit of $3.40 versus $3.34 consensus analyst estimates, a $0.06 beat. Revenues grew 12.6% year-over-year (YoY) to $4.43 billion, missing analyst estimates for $4.44 billion. Digital media segment grew 13% or 16% in constant currency YoY to $3.23 billion. Creative revenue rose 11% or 14% in constant currency to $2.63 billion and Document Cloud revenues grew 23% or 25% in constant currency YoY to $600 million. The Company offered mixed Q4 2022 guidance with EPS expected at $3.50 versus $3.47 analyst estimates on revenues of $4.52 billion versus $4.6 billion analyst estimates. Adobe CEO Shantanu Narayen commented:
“Fueled by our groundbreaking technology, track record of creating and leading categories and consistent execution, Adobe delivered another record quarter. With the announcement of our intent to acquire Figma, we believe we have a unique opportunity to usher in a new era of collaborative creativity.”
Is Dilution a Solution? Mama Mia!
The acquisition will be comprised of a 50/50 split of cash and stock. Cash on hand will be used and a term loan if needed. Adobe will grant nearly six million additional restricted stock units to Figma’s employees that will vest over four years after closing. The deal is expected to close in 2023. Adobe expects the deal to be dilutive to non-GAAP EPS for two years after closing, breakeven in year three, and accretive by the end of year three.
Attractive Pullback Levels
Using the rifle charts on the weekly and daily time frames provides a near-term interpretation of the price action in ADBE stock. The weekly rifle chart made a swing low in June near the $338.65 Fibonacci (fib) level. Shares were able to rebound up to $451.15 before sliding into earnings. The weekly downtrend formed on the 5-period MA at $373.70 crossover down through the weekly 15-period MA at $389.32 as shares collapsed through the weekly lower Bollinger Bands (BBs) at $312.08. The weekly stochastic accelerated its sell-off to the 40-band. Shares collapsed through the weekly market structure low (MSL) buy trigger at $326.99. The daily rifle chart breakdown saw the 5-period MA at 348.98 crossover the 15-period MA down at $367.65 as it overshot the daily lower BBs at $300.47. The daily stochastic crossed back down to test the 20-band. Attractive pullback levels for long-term investors sit at the $300.25 fib, $289.59 fib, $269.80, $257.14 fib, $241.25 fib, and the $227.45 fib level.
Close Eyes and Swipe Right at Any Cost
While acquiring a web-first collaborative design platform makes sense for Adobe, the problem lies in the timing and costs. Paying irrationally exuberant, ZIRP, raging all-time high bull market, internet mania prices in a technology bear market accompanied by devastating FX headwinds fueled by rising interest rates underscored by a global recession… reeks of desperation. Adobe received downgrades and/or price target cuts from Oppenheimer, Barclays, BofA Securities and Credit Suisse as the deal adds execution risk, shareholder dilution, overhang, and underscores an overpriced defensive move from Adobe.
Can Lightning Strike Twice?
Does Adobe have beer goggles exhibiting desperation before the lights go on after last call, or do they see an untapped opportunity overlooked by the market? To its credit, Adobe was one of the first major developers to have the foresight to switch to a software-as-a-service (SaaS) subscription model through the cloud in 2011. Back then, you would purchase and own software like Adobe Photoshop for $600-$700 and own it for life, occasionally paying for upgraded versions. The high price made it accessible for professionals but prohibitive for consumers. The introduction of the low-priced cloud subscription model revolutionized the software industry as it provided access to the general public at a low reasonable cost. Adobe can be credited for ushering in the era of cloud computing and sparked its decade long journey from $22 up to nearly $700 per share. Adobe’s current CEO has been with the Company since 1998 and became CEO in 2007 leading the visionary transformation of its products from desktop to the cloud.