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Strong Results Reinforce Adobe Systems Incorporated Stock as a Winner

ADBE stock will head materially higher in the long term

Adobe's Magento is an underappreciated weapon for ADBE stock

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Another quarter, another double beat for Adobe Systems Incorporated (NASDAQ:ADBE). The creative solutions giant has done it again. Powered by a string of double beat quarters, ADBE stock has run-up in essentially straight-line fashion from $100 to $175 over the past year.

The Q4 report was simply more of the same. And this beat was especially big. Earnings came in 10 cents above expectations, while revenues came in $50 million higher than expected. Those are the biggest earnings and revenue beats in several years for Adobe.

But ADBE stock is failing to rally big on the strong results.

Why? The guidance.

The guidance wasn’t bad. It just didn’t change that much from the guide that management delivered at the October analyst day. Management marginally hiked the fiscal 2018 revenue guide, but didn’t change the fiscal 2018 earnings guide. The first quarter guide was largely in-line with expectations.

Does that mean it is time to sell? No.

The same thing happened last quarter. Third quarter numbers blew estimates out of the water, but the guidance was unexciting. Investors weren’t too impressed, and ADBE stock sold off from $155 to $145.

A few months later, the stock is up above $175.

In other words, when it comes to Adobe stock, it pays to ignore the near-term noise and focus on the long-term, secular growth narrative. Fortunately, that part of the ADBE story is as strong as ever.

Adobe Is a Secular Growth Narrative

Adobe just finished off a really, really good year.

Revenues jumped 25% higher, driven by record results across all major operating segments (Creative Cloud, Document Cloud, and Experience Cloud). Margins expanded healthily, and helped turn that 25% earnings growth into 40% operating profit growth.

Adobe also repurchased 8.2 million shares through the year, which helped turn that 40% operating profit growth into 43% earnings per share growth.

This robust growth isn’t expected to slow by much.

Revenues are expected to grow 20% this year. Margin expansion is expected to continue. As are share buybacks. All together, earnings are expected to grow 28% to $5.50 per share.

These growth rates will naturally come down, but they should remain big into the foreseeable future because ADBE has three huge operating segments with secular growth prospects.

First, there is Creative Cloud, which has transformed into the world’s go-to cloud creativity platform. Creative Cloud just had a record year with revenues soaring 31% higher year-over-year.

A part of this growth is subscriber growth (as we move into a visual-first world, more and more individuals will be inclined to use a professional creativity and design platform). Another part of this is up-selling and cross-selling (ADBE continues to roll out premium versions of certain products).

Both of these growth tailwinds will persist into the foreseeable future. Consequently, Creative Cloud is looking at robust growth prospects over the next several years.

Second, there is Document Cloud, which is a pure-play on the secular transformation businesses are making from paper to digital. This shift is only accelerating (Document Cloud just had a record year) and it isn’t going away any time soon.

Not only are businesses going digital, but they are also going mobile. Adobe has already jumped on this (Adobe Scan can now capture and create PDFs on mobile devices), and this stretches out Document Cloud’s growth runway even farther.

Third, there is Experience Cloud, which may be the biggest growth segment for ADBE. This is the part of Adobe’s business where Adobe leverages analytics to deliver actionable insights for customers. Management is pegging the addressable market for Experience Cloud at $53 billion, and that makes sense given robust growth in Big Data and advanced analytics.

So long as companies continue to optimize digital marketing spend by leveraging data, demand for Experience Cloud will remain robust.

Overall, then, Adobe has three huge operating segments with secular growth prospects. That means that while growth may slow, it will remain big into the foreseeable future.

Bottom Line on ADBE Stock

I’m sticking with my $210 price target on ADBE stock.

Earnings at ADBE are expected to grow 24% per year over the next 2 years. The S&P 500 is expected to grow earnings at a 10.5% clip over the next 2 years.

The S&P 500 is trading at 20x this year’s earnings, or about a 90% premium to growth. Adobe stock easily deserves a 100% premium, given much larger growth in out-years. This implies a “fair” price-to-earnings multiple of 48.

A 48x multiple on this year’s earnings of $4.31 implies a fair value of just under $210.

With ADBE stock trading around $175 amid a strengthening secular growth narrative, I think that makes ADBE stock a buy here and now.

As of this writing, Luke Lango was long ADBE.

Article printed from InvestorPlace Media, https://investorplace.com/2017/12/adbe-stock-strong-winner/.

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