Adobe Systems Inc. (NASDAQ:ADBE) has been one of the stars of the stock market since the start of 2017. ADBE stock has risen nearly 57% and expanding the graphics software company’s market cap to over $77 billion.
Adobe stock has done this by repeatedly beaten earnings estimates. But what analysts do when a company is continually beating estimates, of course, is raise the estimates even higher. And coming into its Tuesday, Sept. 19 earnings for the quarter ending in August, Wall Street was looking for a massive $1.01 per share of net income on revenue of $1.81 billion.
That’s nearly double Adobe earnings and 30% more revenue than ADBE stock posted a year ago.
When the analysts whispered among themselves, of course, they were pointing to even higher earnings, $1.05 per share. That would be $518 million in net income. If achieved for a full year, it would come to more than half Adobe Systems Inc. revenue for all of 2013.
How Did Adobe Earnings Do?
When the numbers did come in, Adobe reported non-GAAP earnings of $1.10 per share on revenue of $1.84 billion. All the numbers beat earnings estimates, and the “whisper number” was beaten by 5 cents per share.
The immediate market reaction, however, was negative, the stock falling $2.37 per share or 1.1% in after-market trading on profit-taking. That is still higher than the price it held at the end of trading September 15, two days before the earnings came out. Expect that gap to be closed quickly once the broad market opens again on September 20.
The why of Adobe’s earnings growth is as important to understand as the fact of it. The why comes down to one word: cloud.
Instead of selling software through downloads or packages, Adobe now sells its Creative Cloud, and offshoots like its Marketing Cloud and Experience Cloud for online marketing, in the form of services.
It is all hosted on the Microsoft Corp. (NASDAQ:MSFT) Azure cloud, and delivers regular subscription revenue, eliminating the industry’s seasonality. Adobe’s costs are also fixed, and as customers become accustomed to using the solutions the company’s lock-in of this revenue only increases. Small wonder, then that of 32 analysts now following the stock, 22 have it on their buy lists, with only 1 calling it a sell.
ADBE Stock Skeptics Remain
Despite the company’s recent success, there remain many who think it simply must slow down, if only so analysts can catch their breath. Some of those analysts were likely lightening-up after the earnings came out.
Adobe’s past success makes it expensive. At a price to earnings multiple of 54, Adobe stock is very expensive, thus vulnerable to a slowdown in the market for growth stocks. Zack’s has even given it a sell rating, based on its past momentum and expectation for a fall on its next disappointment. It was selling at 30 times the 2018 earnings estimate of $5.10 per share as this was written, a very high figure.
There remain competitors to Adobe, in both marketing and graphics, but none with Adobe’s breadth and depth. They are reduced to competing on price, or by making the lack of a cloud into a marketing feature.
But it is hard to see anything, save a global recession, from slowing Adobe down at this point. With its last pain point, Flash, now set to sunset in 2020, and with its ties to Microsoft closer than ever, Adobe has a firm floor under its high price.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.