Adobe Systems Incorporated (ADBE) Stock’s Cloud Payoff is Already Here

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As Adobe Systems Incorporated (NASDAQ:ADBE) prepares to report results on Dec. 15, its executives are enjoying a merry Christmas from investors.

Adobe Systems Incorporated (ADBE) Stock's Cloud Payoff is Already Here

The company’s heavy investment in cloud and subscription revenue, driven by CEO Shantanu Narayen, is paying off big-time. Revenues are up 20% year-over-year, and net income is up 55%. Profits have more than doubled from where they were in 2013 and 2014, while investments in the cloud transition were being made.

Seasonality from purchases of its graphics and creative software has disappeared, replaced by regular subscription renewals of its “Creative Cloud.” Everything is running like clockwork in downtown San Jose, where the company has its offices.

But for new investors, that’s a problem. The good news is already priced into the stock, which trades at a cloud-like price-to-earnings multiple of 54 and pays no dividend. In a market that will be struggling to tread water in 2017, what is the value in reaching for Adobe?

Naruyen Cleared the Decks for Adobe Stock

Before Naruyen bit the bullet on cloud, Adobe was in serious trouble.

Everyone knew Adobe’s Flash player was vulnerable to hack attack and browsers are now dropping support for it. Even Adobe itself now supports the competing HTML5 standard. The switch of Google Chrome to HTML5 is just the last nail in the coffin.

Today, such news can slide off ADBE stock like water off a duck’s back. Adobe’s Creative Cloud is winning massive contracts, and new versions of Photoshop for client devices are getting strong reviews. The entire product line is being re-focused on getting files from and saving files to the Creative Cloud.

Once Adobe stock became fully invested in the cloud, it could create solutions to problems companies had previously not acknowledged. One example, introduced this fall, is the Sensei network for managing images, using artificial intelligence and machine learning to figure out what images users want and get them quickly.

Once it has a solid base of revenues and debt under control, meanwhile, Adobe could start acquiring companies to fill out the product line, such as TubeMogul, bought to improve its Marketing Cloud. TubeMogul is a video advertising platform, acquired for $540 million, whose acquisition closed in the most recent quarter.

The idea is that ad shops can create in ADBE, analyze their marketplaces and then buy advertising without leaving the Adobe cloud.

Analysts are expecting big things Thursday, year-over-year earnings growth of 29% to 86 cents per share, and revenue of $1.59 billion. The main challenge investors see is managing currency exchange rates, hedging its abundant profits around the globe.

What More Can We Expect From ADBE Stock?

The problem, as previously noted, is that these expectations are already in the stock price. Adobe crushed third-quarter earnings estimates, as our Richard Saintvilus noted, and led analysts to raise their one-year price estimates to $112/share. The stock is already halfway there.

Most analysts that follow the company have Adobe rated as a buy with a mean estimate of fiscal 2018 earnings of $3.83 per share. Even if Adobe meets that goal — a boost of nearly 25% from this year’s solid earnings — it would have a forward P/E of over 27, well above the average S&P 500 stock.

Buying ADBE stock today not only means you believe the company will perform as it should, but that the global economy will keep moving forward as well. If you’re optimistic on both the micro and macro level, you can buy Adobe. If you have the least bit of pessimism, avoid it.

Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

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Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


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