Shares of Adobe Systems Incorporated (NASDAQ:ADBE) made gains so far in 2016, up close to 7% and more than 30% off February lows.
But at 26 times fiscal 2017 estimates of $3.81 per share, ADBE stock is no longer a bargain. And investors must reconcile the upward potential versus the risk of holding these shares through the Adobe earnings report.
The San Jose, California-based tech company will report third-quarter fiscal 2016 earnings results after the closing bell this afternoon. ADBE stock is up a fraction from Monday’s close of $99.68.
ADBE Stock By the Numbers
The digital marketing software specialist reported soft second-quarter revenue totals and issued weak guidance back in June.
True, the company reported strong second-quarter deferred revenue, which grew to $1.68 billion. Revenue was boosted by a 26% rise in the Digital Media segment, reaching a record $943 million, while Creative cloud revenue grew 33% to a record $755 million.
Adobe nonetheless issued an outlook that failed to reflect the confidence the market has displayed in ADBE stock. For the just-ended quarter, Adobe forecasted earnings per share (EPS) in the range of 69 cents to 79 cents, while revenue is seen in the range of $1.42 billion to $1.47 billion.
Both ranges compare to consensus of 72 cents in EPS on $1.45 billion. Still, the measures imply year-over-year growth of 33% and 19%, respectively.
In other words, from a valuation perspective, while Adobe stock seems pricey, the company’s growth supports the premium. Plus, given the extent to which Adobe’s cloud solutions continue to power digital transformation at the world’s biggest brands, ADBE stock seemingly has tons of runway left.
And that’s to say nothing about the fact that tech giants like Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, NASDAQ: GOOGL) subsidiary Google use Adobe’s technology to expand their digital advertising duopoly.
The Bottom Line for Adobe Earnings
All of these bullish factors already play into the stock’s high expectations, making Adobe a risky bet if the company were to miss estimates and disappoint again with weak guidance.
At around $100 per share, ADBE stock, which has a consensus price target north of $112, is projected to deliver 12% gains. It’s nothing to flip about. But from a risk-versus-reward perspective, I would hang on for the ride.
At the time of publication, Saintvilus did not hold any stock in the companies mentioned.