Adobe plunges after Q4 guidance falls short

Adobe (ADBE) reported fiscal third quarter earnings that topped Wall Street estimates on both the top and bottom lines, but shares plunged in after-hours trading on its outlook. Adobe reported adjusted earnings of $4.65 per share, topping the Bloomberg consensus estimate of $4.53. Revenue was $5.41 billion, just above the expected $5.37 billion.

For Q4, Adobe sees revenue of $5.50-$5.55 billion, short of the $5.60 billion Wall Street was expecting.

Interactive Brokers Chief Strategist Steve Sosnick tells Yahoo Finance that what Adobe is seeing is part of a wider market trend. "It's necessary to beat your posted EPS number, but it's no longer sufficient," he says, adding companies need to hit on all their metrics given how "aggressively" stocks like Adobe have been priced.

Sosnick joins Market Domination anchors Julie Hyman and Josh Lipton in discussing the tech giant's results.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Stephanie Mikulich.

Video transcript

Because we're just getting some numbers out from Adobe that we want to bring to you.

Uh The company reporting third quarter numbers here third quarter revenue up 11% to 5 point 1,000,000,005 $0.41 billion.

Excuse me, that's ahead of estimates.

Uh earnings per share 465 which is 22 excuse me, 12 cents ahead of estimates here, the company's fourth quarter forecast that might be causing a little bit of trepidation among investors fourth quarter revenue gonna be five and a half to $5.55 billion.

It looks like analysts on average have been looking for $5.6 billion.

Um And specifically here, it looks like the forecast is short in its digital experience revenue business.

It's a smaller part of their business as well as the digital media revenue, which is the bulk of the company's business there.

They expect at most $4.12 billion short of the 4.44 point 1 $4 billion that analysts had been estimating the company exec are sounding a, you know, confident tone here.

I mean, you see uh uh the CEO shot or Ryan talking about record Q three performance, talking about relentless innovation, commitment to delivering value to our customers.

Talks about uh groundbreaking advancements in A I across the portfolio, meaning creative Cloud, document cloud experience cloud.

Uh the CFO talk about how they delivered a cash flows of over 2 billion exit the quarter with record RPO, the mass markets, they're catalyzing um you know, obviously Dobe leader in in creative content tools and marking automation software.

I mean, there there were questions heading into the print, heading into this print, you know, year to date, the stock had not done much Julie.

There are questions out there about, you know, their exposure to marketing budget pressures.

Um That can be a challenge obviously when the economy is as we were just talking about cooling.

Yeah, and there were a lot of questions about what A I was going to mean to them if their customers, a lot of them are graphic design professionals and they, you know, now you can go to an A I and get an image.

There were a lot of questions and, and Adobe was trying to incorporate that, but of course, there have been some, some questions about how that was gonna play out.

Um And I wanna bring Steve Sink back into this conversation because I, I think that's the, the part that is sort of interesting here is we know A I is doing something now, you know, it's affected some companies positively, some companies negatively.

But there, there is still a lot of uncertainty about how it's all gonna play out.

The problem here is, and this, you know, goes back to the love for NVIDIA because they, you know, Jensen Wong is saying people are, you know, my customer, I can't keep my customers happy, but ultimately, who's keeping the customers, customers happy?

Are they, are they being able to monetize this?

So right now you've got this gold rush, you know, into A I, but we don't really know that it's how it's going to play out.

We don't know that, you know, are you replacing some of your lowest level employees with much more expensive people to monitor and, and install the technology?

Where is the productivity?

We, we don't know yet.

I'm not gonna, I'm not gonna dismiss it, but this is normal where, you know, you get the enthusiasm, but then there's the implementation and that's a problem and what we're seeing now with the stock with Adobe declining 8%.

It goes back to something we discussed last time I was here, which is it, it's, it's necessary to beat your posted EPS number, but it's no longer sufficient that when these stocks are so heavily valued, Adobe came into this with about a 44 pe you, you better, you, you got a hit on all your metrics here.

So a little bit of weak guidance, sorry out you go and, and that's, you know, that's not necessarily fair, but that's what happens when you've, when you've priced these stocks so aggressively.

Yeah, it's interesting too, just as we were making our way through earnings season, you know, you would listen to some of these business software makers and some of them, at least we're talking about, you know, challenges as you are dealing with an economy that's moderating.

That is a pressure for it.

Budgets, marketing budgets, right.

Well, that's what it comes down to is, is there's a lot of signs of moderation, you know, right now II I my bigger concern right now is that, is that the consumer is getting narrowed out from the, from the bottom.

You know, we, we've seen, you know, you've reported on the dollar stores getting, getting clobbered and that's, that's kind of a bad sign in the sense that, you know, ultimately, if, if, if, if a large segment of the population, you know, the most vulnerable section of the population is, is really in trouble that that tends to, you know, sort of have a problem.

The, the problem seeps upwards Walmart is still doing ok, targets still doing ok.

But, you know, this is, this is where you get into the, the economics of it and the slowing economy is, you know, do we need the lower interest rates just to sort of keep the party going?

Um, or do we need the lower interest rates because they're really gonna have an economic impact, you know, to some extent we liked the party that we got when we had zero interest rates.

But guess what?

We're not getting those no matter what the, the question, you know, is where is the neutral rate?

And I, I fed saying 2.5 and I think it's probably really somewhat higher than that.

But so are we gonna get to party again?

And are we still priced for a party?

I don't, I don't know.

And this is really what we have to wrestle with.

All right, Steve.

Always great to have you on set.

Good seeing you.