As with the broader tech sector, Adobe (ADBE) stock has rebounded nicely over the past several weeks, rising 3% in thirty days, including 45% over the past six months, besting the less-than 11% rise in the S&P 500 index during that span. But with Adobe stock up 31% year to date, compared with 18% rise in the S&P 500, how much more room does the stock has to run?
The digital cloud giant giant is set to report third quarter fiscal 2021 earnings results after the closing bell Tuesday. It would seem the market is expecting Adobe is expected to report another strong quarter, according to multiple Wall Street analysts who cited sustained growth not only from the work-from-home tailwind, but also from what is being described as the secular digitization trend. The company’s product offering is also seen as vastly differentiated from potential competitors.
Accordingly, Adobe shares have surged beyond the Street’s 12-month consensus price target. This is even as analysts’ consensus price targets have risen over the past six months. Investors want to know: Are more gains ahead for Adobe or is now the time to take profits off the table? The company is benefiting from rising profit margins during its transition to a cloud-based subscription services 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 August, Wall Street expect the San Jose, Calif,-based company to earn $3.01 per share on revenue of $3.89 billion. This compares to the year-ago quarter when earnings came to $2.57 per share on revenue of $3.23 billion. For the full year, ending October, earnings are expected to rise 21% year over year to $12.24 per share, while full-year revenue of $15.68 billion would climb 21.8% 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 Q2 the company beat on both the top and bottom lines, delivering record quarterly revenue of $3.83 billion, up 22.6%, beating estimates by $107 million. Q2 adjusted EPS surged 38% year over year to $3.03, thanks to a 25% rise in the Digital Media revenue to $2.79 billion.
Creative revenue surged 24% to $2.32 billion, while Digital Experience revenue grew 21% with subscription revenue up 25%. On Tuesday investors will want to see what Adobe can do for an encore.
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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