Adobe Stock Is on Cloud Nine — And It’s Valued There, Too

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Adobe Systems Incorporated (ADBE) has had its head in the cloud for a few years years now, and that’s been great news for anyone holding Adobe stock.

Adobe stock ADBEHeck, just look at the latest results.

Adobe stock is some 7% today after ADBE easily beat Wall Street estimates on both the top and bottom lines thanks to strong growth in subscription revenue. ADBE has been transitioning to selling monthly subscriptions to its portfolio of products on the web — rather than taking a big upfront payment for a package of software — for a couple of years now, and the market likes the results.

Indeed, Adobe stock is having a very good, market-beating year. No, this is nothing spectacular, to be sure, but any trader or investor would take it: For the year-to-date, ADBE is up more than 25%, more than doubling the S&P 500.

Adobe stock really started to pull away in early 2013, when the company announced it would focus on selling subscriptions to hit products like Creative Suite, calling the new offering Creative Cloud. Lo and behold, over the last two years, ADBE has more than doubled to crush the 45% return of the S&P.

The most recent quarterly report only underscores the wisdom of Adobe’s new strategic course.

For the three months ended Nov. 28, ADBE said profit rose to 73.3 million, or 14 cents a share, up from $65.3 million, or 13 cents a share, a year ago.

On an adjusted basis (which is what analysts typically look at), earnings rose to 36 cents. That exceeded Street forecasts by 6 cents a share, according to a survey by FactSet — a big earnings beat. Revenue increased 3% to $1.073 billion, also ahead of Street estimates.

Adobe Stock Floating on a Cloud

If there was any doubt the cloud-based approach has been a success, just take a look at some of these details: ADBE added nearly 645,000 new Creative Cloud subscriptions in the quarter. That follows the 502,000 subscribers ADBE signed up in the previous three-month period. Indeed, ADBE now has 3.45 million Creative Cloud subscribers, or 2 million more paid subscribers than it had at this point last year.

Subscription revenue from cloud-based services now accounts for 66% of total revenue, up from 44% a year ago. Even more promising is that Adobe remains committed to investing in this business. The company just announced a deal to buy Fotolia — a stock-photography provider — for $800 million.

And yet …

Bottom Line

But just because ADBE appears to be sitting on cloud nine, that doesn’t mean Adobe stock is a buy at current levels. As we said in June, this successful strategic shift to cloud-based subscriptions looks like it’s already baked into the price — and it still looks that way now.

Adobe stock currently goes for 22 times forward earnings, which essentially is in line with its own five-year average. No, it doesn’t look particularly expensive, but it needs a sizable pullback before it becomes a good deal.

Adobe’s cloud-based future is bright, but that’s not exactly a market secret. That’s why Adobe stock is a buy — but only on a dip.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/adobe-stock-adbe-earnings/.

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