As with the broader tech sector, Adobe (ADBE) stock has rebounded nicely over the past several weeks, rising 15% in thirty days, including almost 10% in the past five trading sessions, besting the less-than 1% rise in the S&P 500 index.
The digital cloud giant giant is set to report second quarter fiscal 2021 earnings results after the closing bell Thursday. It would seem the market is expecting Adobe to report a monster quarter. But investors want to know: Are more gains ahead for Adobe or is now the time to take profits off the table? Now would be the wrong time to sell given the sustained growth Adobe is enjoying not only from the work-from-home tailwind, but also from what is being described as the secular digitization trend.
Gregg Moskowitz, analysts at Mizuho, recently initiated coverage on the digital cloud giant with a Buy rating and $600 price target. The company’s "expansive portfolio of software solutions has made it the gold standard in content creation, consumption, and collaboration,” Moskowitz noted. What’s more, Adobe’s profit margins have steadily risen during its transition to a cloud-based subscription services subscription business within both its Digital Media and Digital Experience segments.
Just as noteworthy, Adobe’s profit margins has steadily risen during this transition as the subscription business — for both its Digital Media and Digital Experience segments — eliminating the need for periodic software upgrades. While the company’s cloud-based offerings are relatively unique, Adobe operates in a crowded software market which included stalwarts Salesforce (CRM) to Workday (WDAY) and Oracle (ORCL), among others. While the stock is not cheap today, it doesn’t appear as if it will get cheaper given the company’s many growth catalysts.
For the quarter that ended May, Wall Street expect the San Jose, Calif,-based company to earn $2.81 per share on revenue of $3.73 billion. This compares to the year-ago quarter when earnings came to $2.45 per share on revenue of $3.16 billion. For the full year, ending October, earnings are expected to rise 14% year over year to $11.86 per share, while full-year revenue of $15.47 billion would climb 20.3% year over year.
The company’s Digital Media Solutions segment, which accounts for more than 72% of its total revenues, remains the driving force behind its growth trajectory, particularly due to growing adoption of its enterprise services which is bringing in more customers. That increase in demand is poised to be reflected strongly during the quarter. The pandemic-induced need to work-from-home has fueled increased demand Adobe’s digital products such as its Acrobat document reader and Adobe Sign offerings.
What’s more, Adobe’s Creative Cloud segment and the company’s increased focus on the education segment is also a growth catalyst where there has been strong acceleration. In Q1 the company beat on both the top and bottom lines, delivering record quarterly revenue of $3.91 billion, up 27% which beat estimates by $150 million. Q1 adjusted EPS surged 38% year over year to $3.14, thanks to a 32% rise in the Digital Media revenue to $2.86 billion.
Creative revenue surged 31% to $2.38 billion. The company posted Digital Media ARR (annual recurring revenue) of $10.69 billion, up $435 million from Q4. It was a strong quarter across the board. On Thursday investors will want to see what Adobe, which issued strong Q2 and fiscal year guidance, can do for an encore. As such, now would be a great opportunity to add to an existing position, betting on not only on another top and bottom line beat, but also upside guidance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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