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Why Adobe Systems Incorporated (ADBE) Stock Will Keep on Truckin’

Adobe has beat earnings expectations for four straight quarters

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It was only a few years ago that investors were wondering whether Adobe Systems Incorporated (NASDAQ:ADBE) was in a long-term decline. Photoshop and Flash seemed likely to be victims of the shift away from desktop usage. Adobe earnings plunged in FY2013 and declined again in fiscal 2014. ADBE stock looked like dead money.

Why Adobe Systems Incorporated (ADBE) Stock Will Keep on Truckin'
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Adobe stock looks very different now, however. ADBE has almost quadrupled in the last five years.

Photoshop and the company’s Document segment overall have flattened out, as predicted. But success in Adobe’s Marketing Cloud and Digital Media has led Adobe earnings and ADBE stock steadily higher.

There’s no reason to expect a change in ADBE stock coming out of the first quarter release, due Thursday. Expectations are high, to be sure. But Adobe earnings have beaten those expectations for four straight quarters. Q1 results seem likely to drive a fifth straight beat.

Adobe Earnings: Expect Growth

Again, expectations are high coming into Adobe earnings for the first quarter. Wall Street consensus suggests a 19% increase in revenue and further expansion in margins. Earnings-per-share are expected to rise 30%, to $0.87 from $0.66.

But if that seems like a tall order, bear in mind that both are relatively in line with ADBE earnings and sales guidance after Q4. (Analysts are expecting a bit higher revenue growth, with guidance suggesting an ~18% increase.) And of late, Adobe has had no problem beating its guidance — and Street estimates.

Both FY15 earnings above $2 and FY16 earnings above $3 (both non-GAAP) exceeded the company’s long-term targets laid out after fiscal 2013. In FY16, Adobe earnings beat consensus — handily — in each of the last four quarters, helping drive further gains in ADBE stock.

While the absolute growth rates sound high, estimates actually suggest a deceleration from fiscal 2016 results. Revenue increased 22% last year, with EPS rising nearly 50%. With continued cloud adoption boosting both sales and margins, there’s little reason to see much of a slowdown in fiscal 2017. That should lead to Q1 numbers looking solid — and likely further gains for Adobe stock.

Potential Catalysts for ADBE Stock

Headline numbers aside, the Adobe earnings release will have more information on the company’s cloud transition. What has been impressive about Adobe is that cloud adoption has driven higher overall sales.

Unlike, say, Microsoft Corporation (NASDAQ:MSFT), where cloud versions of Office are just cannibalizing product sales, ADBE’s overall top line is growing. The company’s ARR (annualized recurring revenue), a direct measure of strength in cloud services, will be a closely watched metric in Q1.

One point of concern on that front might be questions about whether ARR is going to hit a ceiling soon. That figure already represented nearly two-thirds of Adobe revenue in fiscal 2016. If investors worry about potential diminishing returns in that initiative, ADBE stock could struggle coming out of earnings.

In addition, Marketing Cloud results will be closely watched, as that’s the one area where Adobe isn’t a dominant leader. Its Photoshop and Acrobat businesses have little in the way of competition, but cloud-based marketing is a tougher field.

Adobe is going against major competition: Salesforce.com, Inc. (NYSE:CRM), Oracle Corporation (NYSE:ORCL) and International Business Machines Corp. (NYSE:IBM), among others. If Adobe shows that it’s taking further market share in that business, there’s really nothing to stop further growth — and further gains for ADBE stock.

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Article printed from InvestorPlace Media, http://investorplace.com/2017/03/adobe-systems-incorporated-adbe-stock-keep-truckin/.

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