What Happened?

Shares of creative software maker Adobe (NASDAQ:ADBE) fell 5.8% in the morning session after the major indices declined, with the Nasdaq down 1.9%, while the S&P fell 1.12% as markets reined in some of the post-election optimism. The decline follows remarks from Federal Reserve Chair Jerome Powell indicating that the Fed's decision-making committee is not in a hurry to cut interest rates. Consequently, investors have reduced their expectations for another 0.25% rate cut in December 2024. 

Recent inflation data has renewed the debate of how much more rates need to come down and what the cadence of future cuts should be. Specifically, the Consumer Price Index (CPI) for October 2024 increased by 0.2% month-on-month, while headline inflation stood at 2.6% year-on-year. The latter is getting closer to the Fed's 2% target. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Adobe? Access our full analysis report here, it’s free.

What The Market Is Telling Us

Adobe’s shares are not very volatile and have only had 6 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 5 months ago when the stock gained 17% on the news that the company reported a “beat and raise” quarter. First-quarter results beat analysts' revenue, remaining performance obligations (RPO – leading revenue indicator), and EPS expectations. These beats were driven by massive outperformance in its net new Digital Media ARR (annual recurring revenue), which clocked in at $487 million (vs estimates of $434 million). 

Thanks to the strong results, Adobe upgraded its full-year net new Digital Media ARR and EPS guidance, sending the stock price higher. Its revenue guidance for next quarter missed Wall Street's estimates, but that didn't matter too much because the market cares most about its digital media segment. 

Overall, this was a great quarter that put a big dent in the bear argument that ADBE’s best days are behind it due to increased competition.

Adobe is down 13.7% since the beginning of the year, and at $499.18 per share, it is trading 21.4% below its 52-week high of $634.76 from February 2024. Investors who bought $1,000 worth of Adobe’s shares 5 years ago would now be looking at an investment worth $1,678.

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