Building Portfolio Value With Adobe

Adobe Is A Company Reborn 

Adobe NASDAQ: ADBE is one of those blue-chip, legacy tech companies that almost became irrelevant. Not to say that Adobe was ever really in danger of going out of business, only that it had reached the end of its visible growth cycle. Luckily for investors, the shift towards cloud-based services and then, later, the boost to digitization provided by the pandemic have reinvigorated this company and sent shares to new highs. Now, more than a year after the pandemic began, the company is still growing and guiding revenue above consensus estimates.

“Adobe had an outstanding second quarter as Creative Cloud, Document Cloud and Experience Cloud continue to transform work, learn and play in a digital-first world,” said Shantanu Narayen, president and CEO, Adobe. “Our innovative product roadmap and unparalleled leadership in creativity, digital documents and customer experience management position us for continued success in 2021 and beyond.”

Adobe Powers The Content Of The Internet

Adobe was perfectly positioned for the pandemic because it helps businesses, organizations, and individuals harness the power of the internet. Where microchips, hardware, and networking connect you to the Internet it's companies like Adobe that actually make it work in practical ways. Adobe's fiscal Q2 revenue proves the company's value to businesses, rising 22.7% over the last year to $3.84 billion and beating the consensus by 290 basis points. 

On a segment basis, the core digital media segment grew 25% over the last year with notable strength in the Document Cloud sub-segment. Document Cloud services revenue came in at $469 million representing a 30% growth over the past year while creative revenue grew by 24%.  The Digital Experience segment saw its revenue increased 21% over the last year with a 25% increase in Digital Experience Subscription revenue.

The company wasn’t able to drive significant margin expansion but the revenue strength did carry through to the bottom line. The GAAP EPS of $2.32 is up slightly from last year but beat the consensus by $0.22 while the adjusted EPS of $3.03 grew 24% over the last year and beat the consensus by $0.21.

Looking forward, the company is expecting to see business strength continue into the next quarter. The company is expecting a little more than 1% sequential revenue growth driven by double-digit year-over-year increases in both Digital Media and Digital Experience. This compares to the consensus estimate of a flat to slightly lower revenue and adjusted earnings. As for earnings, the company expects adjusted earnings to come in the range of $3 versus the consensus of $2.90.

The Analyst, Wow, Really Like Adobe

No fewer than 14 sell-side analysts have come out with positive commentary in the wake of the Q2 earnings release. Of them, only one raised the rating and that was from hold to Outperform by Oppenheimer, but they all raised their share price target. The other 13 already had a buy-equivalent rating on the stock. The broad consensus is near $605 or about 10% upside from current price action, but the consensus of the 14 fresh estimates has this stock trading closer to $650 or about an 18% upside and we think that estimate might be low.

Shares of adobe have been in a consolidation over the past several months and are breaking out with today's news. The breakout confirms the consolidation and the rally leading up to it giving us a target Closer to $750 that we think it might be reached by the end of the year.