Adobe Systems Incorporated: After a Blowout Q1, ADBE Is the Cloud Stock to Ride

Adobe Systems Incorporated (ADBE) stock is soaring Friday, jumping as high as 7% in early trading after a blowout quarter and rosy guidance got investors licking their chops in anticipation of what could lie ahead.

ADBE: After a Blowout Q1, Adobe Is the Cloud Stock to RideRewind the clock three months, and the successes in the fourth quarter of 2015 look very much like what we just witnessed from Adobe in Q1 2016. In the wake of Adobe’s December earnings announcement, I had this to say about ADBE stock:

“Frankly, the cloud has been a godsend for Adobe, and it’s the main reason analysts expect the company’s revenue growth to actually accelerate in both fiscal 2016 and fiscal 2017.”

Thursday’s earnings report showed exactly why the cloud is a godsend for Adobe.

ADBE Stock Continues Cloud Dominance

Adobe reported record quarterly revenues in the fourth quarter, as the top line grew 25% to $1.38 billion, cruising past estimates for $1.34 billion. Adjusted earnings per share clocked in at 66 cents, soaring 50% year-over-year. Wall Street expected Adobe stock to earn 61 cents per share.

Not bad, right? Just wait, it gets better.

While beating expectations in a given quarter is great — which ADBE shareholders should be used to, as this was the 10th straight quarterly earnings beat — Wall Street actually cares much more about what you’re going to do next. And Adobe crushed it there, too.

The software giant, known for products like Photoshop, Acrobat and Flash, said it expects adjusted EPS of $2.80 on revenue of $5.8 billion in fiscal 2016, both better than consensus projections for $2.76 and $5.74 billion, respectively.

Central to the ADBE story is a metric called annualized recurring revenue, which measures subscription revenue on an annualized basis. Recurring revenue jumped 8.5% to $3.13 billion from its pace in Q4. Adobe notes that robust Creative Cloud adoption helped drive this growth.

During the quarter, Adobe bought back about 1.5 million shares of Adobe stock, putting $133 million back in shareholder pockets and lowering the outstanding share count.

Great Results, but Mind the Risk

Adobe deserves to be gaining ground on Friday after a quarter like the one it just put in. More impressive still is its consistency and ability to execute — you’d be hard pressed to find another company with 10 straight earnings beats to its name and a fabulous growth outlook ahead of it.

That said, the valuation of Adobe shares is somewhat of a concern here, as we noticed the market selling ADBE off hard to begin 2016.

When fears over China’s economy roiled the markets, ADBE stock fell more than 21% before hitting February lows under $74/share. At 75 times earnings, it understandably doesn’t look cheap.

Adobe’s forward price-earnings multiple of 25 is somewhat more manageable, but frankly, it may have to keep beating earnings expectations quarter after quarter to earn its multiple. At the end of the day, Adobe is a top-tier growth stock riding one of tech’s hottest trends — but if you want to play the game, it won’t be cheap.

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.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/adobe-adbe-stock-earnings-cloud/.

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