Why Adobe Stock Plunged 12% After Earnings Report

Adobe (ADBE -12.59%) The stock was down 12.4% as of 10:30 a.m. ET Thursday, despite beating earnings in its fourth-quarter 2024 annual report last night.

At the start of the report, analysts predicted Adobe would earn $4.67 per share on revenue of $5.5 billion. In fact, Adobe earned $4.81 per share and sales topped $5.6 billion.

Adobe’s Q4 results

The news wasn’t all good. Adobe grew revenue 11% year over year, helping make fiscal 2024 a “record year” for the company. (Annual sales also increased 11%.)

However, it turns out that the company’s quarterly profit of “$4.81” was not a GAAP number. Actual earnings, calculated using generally accepted accounting principles (GAAP), were significantly lower – just $3.79 per share.

Still, it represented a 17% increase in quarterly earnings and lifted full-year net income to $12.36 per share – a year-over-year growth of 4.6%.

Adobe also performed exceptionally well in cash generation, reporting quarterly free cash flow of $2.9 billion – an 85% increase year-over-year. And for all of fiscal 2024, Adobe generated positive free cash flow of $7.9 billion, up 14% year-over-year, according to data from S&P Global Market Intelligence.

Is Adobe stock a buy?

Impressively, that works out to a 46% higher real cash profit than the $5.4 billion that Adobe reported as net income for fiscal 2024. As a result, Adobe stock looks expensive when valued on net income (P/E ratio is 39.3x). When valued on cash earnings, Adobe has a lower price-to-free cash flow ratio of 26.9.

Is this cheap enough to buy Adobe shares?

Normally I would say no. Earnings growth has been poor, and a P/E/FCF of 26.9 divided by Adobe’s FCF growth rate of 14% gives me a P/E/Growth ratio of 1.9 – almost twice What I want to see before I call a stock “cheap.” Still, Adobe appears cheaper than many other technology stocks in an overpriced market. If you absolutely think you need to own a tech stock, I would at least say Adobe continues to be a strong performer.