Shares of software giant and Photoshop creator Adobe (ADBE) were all over the place in early trading on Friday, after third-quarter earnings impressed but fourth-quarter guidance caused worries.
ADBE stock, which is up about 10% this year, initially sold off sharply, losing about 3% in premarket trading. But as soon as the opening bell rang, the buyers came rushing in. Shares then immediately soared more than 5% in the first half-hour of trading.
With such divided market opinions on Adobe earnings, how should investors interpret the company’s most recent quarter?
Here’s a recap of ADBE stock in the wake of the market’s bipolar reaction to Q3 earnings:
Adobe’s Strong Earnings
All in all, last quarter was a pretty strong one for the San Jose, California-based company.
It reported record quarterly revenue of $1.22 billion, up 21% year-over-year and modestly above the consensus $1.21 billion expectation. ADBE stock would not disappoint on third-quarter earnings per share either, as non-GAAP EPS clocked in at 54 cents vs. the Street’s 50-cent expectation.
The strong quarter — and perhaps the underlying reason ADBE stock wouldn’t stay in the red for long today — was driven by outsized success in its cloud operations. Adobe Marketing Cloud posted record revenue of $368 million last quarter, up 27% annually.
Adobe President and CEO Shantanu Narayen explains:
“Content and data are the currency of business today. Adobe’s industry-leading Creative Cloud, Adobe Document Cloud and Adobe Marketing Cloud solutions let customers deliver more valuable, personalized experiences that drive greater business impact.”
Adobe’s recurring revenue also hit 73% of total revenue, an impressive metric that puts less pressure on the company to find new customers each and every year.
And don’t underestimate the buzziness of nebulous cloudspeak in the stock market today. Salesforce (CRM) is up 25% in the last year and 140% in the last five years. That’s largely because the company hasn’t missed on earnings once in the last 14 quarters, but its mindshare on Wall Street as a premier “cloud stock” hasn’t hurt either.
I mean, is CRM stock really worth 75 times forward earnings? I doubt it.
While I don’t think ADBE falls into quite the same category, even titans of tech like IBM (IBM) are taking pains to highlight the emergence and growth of their cloud operations. With IBM’s core hardware and software businesses declining relentlessly quarter after quarter, focusing on the only sexy part of the business ain’t a bad strategy.
But What’s With ADBE Stock’s Guidance?
The reason investors briefly punished ADBE stock in morning trading, however, had much more to do with the future than the past. Guidance for the fourth quarter was for 59 cents per share, a nickel less than consensus, on revenue of $1.3 billion, slightly below the $1.36 billion expectations.
At the end of the day, Wall Street isn’t stupid, and no matter how good your last quarter was, if your next quarter is expected to suck, that stock will get annihilated. So, I think there are a few reasons ADBE stock wasn’t annihilated today.
First, when you only post one miss in 15 quarters, it begins to look like estimates are set artificially low to begin with. Adobe can’t control the analysts completely, but guiding lower certainly won’t cause Wall Street to raise expectations for the current quarter.
Read: There’s a strong chance ADBE is being conservative with its guidance.
The second reason ADBE stock bounced back so quickly was simply bullish analyst sentiment. Both Evercore ISI and Jefferies raised their price target on shares, with Evercore ISI modeling for $88 per share and Jefferies raising its target from $90 to $92.
This caused a flurry of buying in early morning trading, and by around 10 a.m., volume was about 15 times higher than it usually is by that time of day.
Bottom Line
While I don’t think ADBE stock represents a must-have opportunity for investors, the company is truly using the cloud like it’s meant to be used, bringing its legacy customers to a subscription-based model that they seem more than willing to support year after year.
Since it’s still trading below mid-August (pre-crash) levels, ADBE stock is a solid holding if you’re looking to fill out your portfolio.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
