Adobe (NASDAQ: ) saw a drop of over 4% in earnings after the results were announced. The top- and bottom line numbers failed to impress.

Overall, Adobe had a good quarter but investors expected more. Shares had experienced a great run and investors were expecting more.

Adobe stock is down over 11.6% from the all-time high but up more than 24% for the year. The valuation is still too high for me, but I don’t think I am too excited about it. Therefore, I’m neutral about the name.

What is the reason why stock prices are falling?

Adobe’s third quarter results were not as dire as some people thought. The outlook for earnings was very positive. But that is the risk of buying hot stocks. Adobe lost its footing because the expectations were too high.

Digital Experience, the segment responsible for the solid quarter-end beat, was largely to blame. This should be a strong area that will continue to gain momentum as digital transformation continues.

With revenues up 22% year-over, and $3.11 per share earnings, the results beat Street consensus by just a penny. Also, operating margins held steady. What was the issue?

The problem was that investors expected more of the company’s top line.

The stock trades now at approximately 19.1 times sales and 49.9x earnings trailing. This type of valuation requires investors to demand both strength and a surprising upside.

The company is expected to continue firing on all cylinders and could surpass its expectations for the next quarter.

It may prove difficult for the shares of this dominant software developer to take off if it does not.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, ADBE stock comes in as a Strong Buy. There are 20 analyst ratings. 17 Buy recommendations and three Hold recommendations.

The average Adobe price target is $721.83. An analyst’s price target can range anywhere from $770 to $670, depending on the share.

Bottom Line

As the cloud-harnessing creative kingpin continues spreading its wings into new verticals, it’s bound to run into some competition, and that could weigh on growth, even as industry tailwinds hold strong.

Adobe still has some amazing managers, such as its CEO Shantanu Naryen.

The business is in excellent condition. Even after the modest post-earnings pullback, the price remains high.

Disclosure: Joey Frenette does not own shares in any of the companies mentioned at time of publication.

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