I argued coming into Adobe Systems Incorporated (NASDAQ:ADBE) earnings that there was no reason to bet against Adobe stock. Adobe earnings had come in ahead of consensus for four straight quarters. Adobe stock had quadrupled in less than five years. As the old saw goes, “The trend is your friend.” Clearly, that trend was in favor of ADBE.
For a fifth straight quarter, Adobe earnings came in ahead of analyst estimates. Non-GAAP earnings of 94 cents per share beat the Street by seven cents. Nearly 22% revenue growth was two points ahead of consensus.
ADBE stock is up roughly 4% in after-hours trading, after yet another quarter that seems to support the long-term bull case for Adobe stock.
Adobe Earnings: The Fifth Straight Beat
Adobe’s fiscal first-quarter earnings were even more impressive than past beats. On average, Adobe earnings had come in about 4% above consensus the past few quarters; in Q1 FY17, Adobe beat by a solid 8%.
Beyond the numbers, the news was good — and broad-based. Digital Media Annualized Recurring Revenue (ARR), a key measure of the company’s success in “cloud,” hit $4.25 billion, up nearly 7% simply in the first three months. Marketing Cloud revenue of $477 million was up over 26% year-over-year, actually accelerating from prior-year growth of 21%. Non-GAAP operating income increased 42%, and non-GAAP net income rose 40%.
As CFO Mark Garrett pointed out in the Q1 release, “Adobe achieved record revenue, profit and cash flow” in the quarter.
All told, the Adobe earnings report was a blowout by any measure.
What Earnings Mean for Adobe Stock
Heading into the quarter, it seemed likely that ARR, in particular, would be a focus of investors. That figure is moving to a larger and larger share of overall revenue: now about 70% on a trailing twelve-month basis. The ability to continue torrid growth even on a base that size — and without simply taking revenue away from legacy product sales, like Microsoft Corporation (NASDAQ:MSFT) does with Office — seems likely to support Adobe stock in trading on Friday.
The second area of focus is in the Marketing Cloud business. Adobe obviously has little competition for Acrobat or Photoshop. In marketing, however, the competitive landscape is very different. Adobe is going up against giants such as salesforce.com, inc. (NYSE:CRM), Oracle Corporation (NYSE:ORCL) and International Business Machines Corp. (NYSE:IBM).
Clearly, Adobe is winning. The nearly 27% revenue growth in that business seems likely to be a major facet of the narrative coming out of Adobe earnings. The marketing business is the one segment where Adobe has true upside: in most of the Creative Media business, for instance, the company’s dominance is such that eventually its growth rate will slow to that of the market as a whole.
Marketing, however, presents a multi-billion-dollar opportunity with literally worldwide potential. And the fact that Adobe is not only surviving, but thriving while fighting some of the largest tech companies in the world has to boost the case for Adobe stock.
Bottom Line on ADBE Stock
All told, the Adobe earnings surprise should be no surprise. This is a company firing on all cylinders, with substantial market opportunities in front of it. I’d be surprised to see the market shrug off the Q1 beat as something already incorporated into Adobe’s stock price. The size of the earnings beat, the strength in cloud, and the performance in the Marketing Cloud segment all point to a stock that should rise in trading on Friday.
And Q1 supports the bull case here. Adobe stock isn’t cheap — but it’s hardly expensive. FY18 analyst estimates likely will be boosted moderately after the strong Q1 FY17 performance.
As they near $5, ADBE stock trades at about 23 times FY18 earnings plus cash. In a market where many lesser companies are receiving similar multiples, that hardly seems excessive. And it seems to leave more room for Adobe stock to run.
Again, “the trend is your friend.” And Adobe earnings in Q1 show that the trend should stay positive for some time to come.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
