Earnings Watch: Adobe in Figma limbo
Head of Equity Strategy
Summary: Adobe reports earnings next Thursday and has something to show as the US software company has seen a negative share price reaction in its past five earnings releases. The competitive landscape is changing which has forced Adobe to attempt an acquisition of industry challenger Figma, but recent investigation from the US Department of Justice might delay acquisition for up to a year putting Adobe in a limbo testing the patience of investors. Trip.com, China's leading online travel agency, reports on Wednesday and investors will judge the result on the company's outlook for Q4 and ideally 2023 as China's reopening is raising the expected travel demand in China for 2023.
Can Adobe stop the negative earnings reactions and calm regulators?
Adobe was for years the darling of Wall Street as the switch to a software-as-a-service model back in 2011-12 moved Adobe from the old software business model to the new recurring service model delivering stable cash flow generation. The market rewarded Adobe with a high equity valuation culminating in late 2021 before the interest rate shock happened in 2022 causing Adobe’s share price to decline 41% this year. The past five earnings releases have all led to a negative price reaction in Adobe shares as growth has come down while cost of capital has gone up. Can Adobe buck the trend next when the company reports earnings? Another question investors will be asking is an update on the company’s $20bn acquisition of the industry challenger Figma, which was lately delayed due to a US Department of Justice investigation of the deal. Adobe reports FY22 Q4 (ending 30 November) earnings on Thursday with revenue growth expected at 10% y/y and EPS of $3.50 up 36% y/y as cost cutting exercises are expected to improve profitability. Adobe is expected to end the fiscal year with revenue of $17.6bn and strong free cash flow generation of $7.3bn which translate into 5% free cash flow yield.
China’s reopening to boost to Trip.com outlook?
Trip.com was a preferred stock among US hedge funds in the years 2012-2017, but as China’s economy began to slow down and the friction between the US and China increased, investor interest in Chinese equities, including Trip.com, declined and for Trip.com the pandemic was a big blow to the travel business. However, China’s strict Covid policy caused investors to believe China’s policy decision was more successful than the policies in Europe and the US and Chinese equities rallied in 2020 and into early 2021. But as mRNA vaccines were rolled out in the developed world the divergence in policies became apparent and China’s economy continued to slow down as the Covid zero policies constrained the economy. Recently, and under pressure from the public, the Chinese government has chosen to move ahead with reopening the economy taking on the associated Covid risks and this could be good for the outlook for travel activity and thus Trip.com. The Chinese online travel agency platform is expected to report earnings on Wednesday with analysts expecting revenue growth of 22% y/y. Analysts expect revenue to increase 50% y/y in 2023 to CNY 29.6bn.
The list below shows next week’s earnings releases.
- Monday: Oracle
- Tuesday: DiDi Global
- Wednesday: Lennar, Trip.com, Nordson, Inditex
- Thursday: Adobe
- Friday: Accenture, Darden Restaurants
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