Along with the vast majority of tech-sector assets, Adobe (NASDAQ:ADBE) stock has retreated from its peak price, prompting questions of what’s next. And this questioning is intensifying with its next earnings report around the corner.
Let’s consider whether ADBE stock is likely to recover as its revenues come into focus.
The scheduled earnings-report date for the developer of Photoshop and Creative Cloud is March 12 as the company announces its fiscal results for the quarter ending in February. This will also be the day when Adobe reveals its financial results for the full fiscal year.
The stakes are high. Will the company beat expectations, or fall short and give traders an excuse to extend the selloff?
Adobe Is Still an Industry Leader
The advent of Photoshop made Adobe a desktop-software-industry leader years ago. And the creation of Creative Cloud shows that the company is not resting on its laurels as the tech industry’s cloud race heats up. But as Adobe heads into earnings, should we still consider it a market leader?
Absolutely.
In fact, Adobe is practically peerless in some respects. According to William O’Neil + Co., Adobe has enjoyed an annualized earnings-per-share growth rate of 24% throughout the past three years. This is a highly impressive figure, and it places Adobe first among its competitors in the desktop software market.
Adobe also has high after-tax and annual pretax margins. Again, it’s the best in the industry.
Considering all this, the company’s quarterly revenue forecast of $3.04 billion and full-year sales forecast of $13.15 billion are not unreasonable.
However, it’s true that approximately 15% of the company’s sales are derived from the Asia-Pacific region. This could prompt questions about the impact of the coronavirus from China. I would counter this with the idea that the fiscal impact is a known factor, meaning that it’s most likely already priced into the company’s projections as well as those of the analyst community.
Is Adobe ‘Better Than Most’?
As a cautious investor, I tend to shun hype-fueled stocks in favor of slow-but-steady assets with long-term growth prospects. Based on his recent assessment of Adobe, Morgan Stanley analyst Keith Weiss seems to maintain a similar viewpoint.
Weiss has assigned an overweight rating to ADBE stock and increased his price target a full 10% from $410 from $450, implying a sizable move north from the current share price. His reasons are compelling from a fiscal-growth standpoint. As Weiss opines, “within a environment of growing macro uncertainty and a software universe where hypergrowth stories still screen very expensive, we find much more attractive risk/rewards in durable EPS-growth stories.”
I’m not a huge fan of tech-sector “hypergrowth stories,” either. Therefore, my outlook tends to align with Weiss’. Regarding earnings-per-share growth stories, Weiss asserts that Adobe “fits squarely in that category.” He even goes so far to say that his firm views “the longer-term growth story for ADBE as better than most.”
That’s high praise from a big-bank analyst, but I find it to be entirely justified.
With recent annual recurring-revenue growth in excess of 20%, along with 55% to 60% growth in segment margins, Weiss’s narrative of “a return to more robust positive earnings-per-share revisions throughout fiscal 2020-2021″could certainly pan out as predicted.
The Bottom Line on ADBE Stock
I’m not quite self-congratulatory enough to say that “great minds think alike” (fine, I’ll go ahead and say it). But joking aside, I really appreciate Keith Weiss’s preference for companies that demonstrate growth without hyper-growth.
With earnings coming up soon, Adobe remains in a strong enough financial position to demonstrate its leadership qualities once again. There’s nothing too “hyper” about that.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.
