Adobe Plunges after JPMorgan Issues Wave of Downgrades

Shares of Adobe Inc. tumbled on Tuesday trading, its second-worst day this year, after JPMorgan downgraded cloud stocks, noting high valuations.

The computer software company skidded 6.60%, or 43.44 points, to $614.86 per share. 

Eventually, it slightly rose 0.02% or 0.14 points to $615.00 in the after-hours trading session. 

At present, Adobe trades at 21 times its revenue. Before its drop yesterday, the company’s share price was 31.00% higher this year, edging a 20.00% gain in the S&P 500. 

The rally pushed the stock to $658.30, slightly lower from JPMorgan’s $680.00 price target. This led the business to reduce its rating to neutral from buy.

Adobe’s steepest dip this year came 11 days ago when its share price slumped 8.20%.

Aside from Adobe, shares of other cloud stocks plummeted following the outlook released by the investment banking firm. 

For instance, Cloudflare Inc. slumped 8.90% or 12.89 points to $132.00 per share. 

Before this downturn, the web infrastructure business posted a 55.00% gain for the year.

In addition, it holds an enterprise value to revenue multiple of 39 for the following year. Still, Cloudflare is 91.00% up and trades at a multiple of 61.

Then, JPMorgan noted Cloudflare could be the most extensive revenue generator in its coverage  within 10 to 15 years. 

This forecast is in line with the efforts of the business to be the fourth popular cloud after Amazon, Microsoft, and Google.

Similarly, IT security company Zscaler lost 7.84% or 24.20 points to $284.34 per share. 

Likewise, cloud monitoring firm Datadog slipped 6.54% or 11.25 points to $160.78 per share after JPMorgan issued a similar downgrade. 

JPMorgan Lowers Adobe and other Software Stocks

Accordingly, JPMorgan analysts lowered their ratings on 13 companies, including Adobe, in their 2022 outlook report on software technology.

They explained that the downgrade is due to the limited upside to their price targets. This also includes valuation in light of the threats of benchmark rate hikes next year.

In the past months, the risks of increasing rates in an environment of surging inflation rippled fears to the tech investors. 

Correspondingly, market participants looked forward to the two-day monetary policy meeting of the Federal Reserve this week. 

They highly anticipated the US central bank to announce a significant policy change on Wednesday.

Additionally, investors anticipated tapering its bond-buying program before the start of rate hikes. 

Moreover, they predicted that the Fed will increase interest rates three times in the next two years, starting in June 2022.

In line with this, possibly higher rates could have an outsized impact on highly valued tech companies like Adobe. 

Rate hikes negatively affect their future cash flow projections, a significant indicator of valuing growth stocks.