Adobe, Workday, and ServiceNow Fall Due to Downgrades

Adobe (ADBE), Workday (WDAY), and ServiceNow shares have lost significant market value in early-market trading today. While Adobe stock has fallen close to 4%, Workday and ServiceNow have fallen 12% and 6%, respectively, as of the time of this writing.

So, why are these stocks trading lower today?

According to a report from The Street, investment bank Citi (C) downgraded Adobe from “buy” to “neutral.” Citi also lowered the company’s target price from $322 to $313. Currently, Adobe stock is trading at $270.

According to Citi, Adobe will struggle to maintain its growth momentum. The momentum drove the stock to record highs over the last five years. Citi analyst Walter Pritchard thinks that investors are overestimating the growth in Adobe’s Digital Experience segment.

Adobe stock has been on a tear. The stock managed to outperform the broader markets by a wide margin. The stock has gained 266% in the last five years. Currently, Adobe stock is trading at a forward PE ratio of 26x.

Compared to the company’s five-year estimated annual earnings growth of 20.7%, you can see that the stock is trading at a premium. The analysts covering Adobe have a 12-month average target price of $313.5, which is 16% above the current trading price.

Workday shares have fallen close to 12% today. According to a Seeking Alpha report, several analysts revised their target prices for the stock after it rose. The report stated that while RBC maintained an “outperform” rating, it reduced the target price from $225 to $212. Macquarie Research expects that new products launched in the event might be “difficult to monetize.”

Jefferies’ research note stated that Workday’s slowdown in the HCM segment means that investors can look for stocks that are more attractive at their current valuation. The stock has gained 84% in the last five years. Currently, the stock is trading at a forward PE ratio of 65x.

Compared to Workday’s five-year estimated annual earnings growth of 28.5%, you can see that the stock is grossly overvalued despite the decline today. Analysts covering Workday have a 12-month average target price of $216, which is 35% above the current trading price. Currently, Workday is trading at $160.5

ServiceNow (NOW) shares have fallen today. Morgan Stanley (MS) downgraded the stock. According to The Street, Morgan Stanley analyst Keith Weiss downgraded ServiceNow from “overweight” to “equal weight.” The analyst is concerned about the company’s declining profit margins due to increased research and development expenses.

Although there are near-term risks, Morgan Stanley has outlined ServiceNow as a “best-in-class software asset.” The stock has gained 295% in the last five years. Currently, ServiceNow is trading at a forward PE ratio of 55x.

Compared to ServiceNow’s five-year estimated annual earnings growth of 33.4%, you can see that the stock is overvalued. However, high growth metrics support the stock. The analysts covering ServiceNow have a 12-month average target price of $318, which is 26% above the current trading price of $253.3.

In September, we said that ServiceNow is a stock to buy on major dips.