Adobe (ADBE) Earnings Alert: Buy or Sell?

Adobe Inc. (ADBE), a leading digital marketing and media solutions provider, reported a revenue and earnings beat in the second quarter of fiscal 2023. The company posted a record revenue of $4.82 billion, above $4.77 billion as expected by analysts. Its adjusted quarterly earnings totaled $3.91 per share, compared to the consensus estimate of $3.79 per share.

“Adobe achieved record Q2 revenue demonstrating strong demand across Creative Cloud, Document Cloud and Experience Cloud,” said Shantanu Narayen, ADBE’s chair and CEO. “Adobe’s ground-breaking innovation positions us to lead the new era of generative AI given our rich datasets, foundation models and ubiquitous product interfaces.”

Moreover, ADBE recorded a net new Digital Media Annualized Recurring Revenue (ARR) of $470 million, exiting the second quarter with Digital Media ARR of $14.14 billion. Creative ARR rose to $11.64 billion, and Document Cloud ARR grew to $2.50 billion.

After delivering an outstanding net new ARR and enhanced profitability in the second quarter, the software company raised its annual targets. It expects full-year 2023 total revenue of $19.25-$19.35 billion. Its Digital Media net new ARR is expected to be approximately $1.75 billion, while its non-GAAP earnings per share are estimated to be from $15.65 to $15.75.

The company, set to its fiscal 2023 third-quarter results after the market’s closing on Thursday, September 14, 2023, expects its revenue for the-to-be reported quarter of $4.83 billion to $4.87 billion. ADBE’s Digit Media net new ARR is predicted to be nearly $410 million for the quarter, and the company expects its non-GAAP EPS of $3.95-$4.00.

ADBE could likely surpass analysts’ expectations for revenue and earnings in the third quarter. Analysts expect the company’s revenue and EPS for the third quarter to increase 9.8% and 16.8% year-over-year to $4.87 billion and $3.97, respectively. Moreover, it topped the consensus revenue estimates in all four trailing quarters, which is impressive.

Dan Durn, executive vice president and CFO of Adobe, said, “Our unique ability to deliver top- and bottom-line growth while investing in groundbreaking innovation sets us up to capitalize on our massive $200+ billion market opportunity.”

Mizuho’s analyst upgraded ADBE to Buy from Neutral and raised its price target to $630 from $520, ahead of the company’s fiscal third-quarter report due this Thursday. Enterprise checks were “generally healthy” and indicative of a “much better” fiscal fourth quarter for the company, the analyst tells investors in a research note.

In addition, Derrick Wook, an analyst at TD Cowen, also expressed his positive outlook on ADBE and upgraded the company’s rating to Outperform. The analyst revised the price target for Adobe, raising it to $600 from $575.

Shares of ADBE have gained 74.1% over the past six months and 67.6% year-to-date to close its last trading session at $564.50. Also, the stock has surged 42.4% over the past year.

Let’s look at factors that could influence ADBE’s performance in the upcoming months:

Solid Enterprise Spending on Software

According to the forecast by Gartner, worldwide software spending is projected to total $922.75 billion, an increase of 13.7% from 2022. The software segment will witness double-digit growth as enterprises boost utilization and reallocate spending to core applications and platforms that support efficiency gains.

Thus, rising corporate spending on digital transformation projects remains a significant tailwind for ADBE stock.

Positive Recent Developments

On August 16, ADBE announced the general availability of the all-new Adobe Express for desktop web. The latest version of the AI-first, all-in-one content creation app with Firefly beta generative AI capabilities will revolutionize creative expression, making it fast, easy, and fun for users of all skill levels to design and share standout content.

With ground-breaking innovations and generative AI at the core of Express, the software company could extend its market reach and boost its sales.

On July 12, it was announced that ADBE’s Firefly, the company’s family of creative, generative AI models, could now support text prompts in more than 100 languages, empowering users to generate high-quality images, create text effects, streamline workflows, and improve productivity in their language of choice.

Further, the service would be localized in 20 languages with versions in French, German, Japanese, Spanish, and Brazilian Portuguese available now. This announcement is expected to broaden ADBE’s Firefly’s reach to millions of new users, driving the company’s growth and profitability.

Robust Financials

For the second quarter that ended June 2, 2023, ADBE’s total revenue increased 9.8% year-over-year to $4.82 billion, and its gross profit rose 10.3% from the year-ago value to $4.24 billion. Its non-GAAP operating income grew 10.4% year-over-year to $2.18 billion. The company’s non-GAAP net income rose 13.2% from the prior-year quarter to $1.79 billion.

In addition, the company’s non-GAAP net income per share came in at $2.82, an increase of 13.3% year-over-year. Also, as of June 2, 2023, ADBE’s cash and cash equivalents stood at $5.46 billion, compared to $4.24 billion as of December 2, 2022.

Impressive Historical Growth

Over the past three years, ADBE’s revenue and EBITDA grew at CAGRs of 15.2% and 16.1%, respectively. The company’s net income increased at a CAGR of 9.5% over the same period, while its EPS grew at an 11.4% CAGR.

Additionally, the company’s levered free cash flow grew at a CAGR of 24.3% over the same time frame. Its total assets increased at an 8.8% CAGR over the same period.

Favorable Analyst Estimates

Analysts expect ADBE’s revenue for the fiscal year (ending November 2023) to come in at $19.33 billion, indicating an increase of 9.8% year-over-year. The consensus EPS estimate of $15.73 for the ongoing year reflects a 14.7% year-over-year improvement.

For the fiscal year 2024, the company’s revenue and EPS are expected to grow 11.9% and 12.9% year-over-year to $21.63 billion and $17.76, respectively.

High Profitability

ADBE’s trailing-12-month gross profit margin of 87.77% is 82.1% higher than the 48.20% industry average. Likewise, its trailing-12-month EBIT margin and net income margin of 33.64% and 26.34% are significantly higher than the respective industry averages of 4.48% and 2.03%.

Furthermore, the stock’s trailing-12-month levered FCF margin of 37.59% is 428.5% higher than the industry average of 7.11%. Its trailing-12-month ROCE and ROTC of 33.68% and 20.61% favorably compared to the industry averages of 1.01% and 2.37%, respectively.

POWR Ratings Reflect Promise

ADBE’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade for Quality, consistent with its higher profitability relative to its peers. Also, it has a B grade for Sentiment, in sync with its favorable analyst estimates.

ADBE is ranked #26 out of 136 stocks in the Software - Application industry.

Beyond what I have stated above, we have also given ADBE grades for Growth Value, Momentum, and Stability. Get access to all the ADBE Ratings here.

Bottom Line

ADBE beat analysts’ estimates for revenue and earnings in the previously reported quarter. Furthermore, the software company’s outlook appears highly positive, thanks to its innovative product offerings, strategic partnerships, and market dominance in the sector.

Moreover, ADBE’s stock is trading above its 50-day and 200-day moving averages of $522.23 and $407.62, respectively. The stock is expected to continue its upward trajectory amid an excellent year for software companies, with a focus on AI ambitions.

Given its robust financials, high profitability, and bright growth prospects, ADBE could be a solid buy before its third-quarter earnings release.

How Does Adobe Inc. (ADBE) Stack Up Against Its Peers?

While ADBE has an overall POWR Rating of B, investors could also check out these other stocks within the Software - Application industry with A (Strong Buy) rating: Nutanix, Inc. (NTNX), IBEX Ltd. (IBEX), and eGain Corporation (EGAN).

For exploring more A and B-rated software stocks, click here.

What To Do Next?

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ADBE shares fell $3.94 (-0.70%) in premarket trading Tuesday. Year-to-date, ADBE has gained 67.74%, versus a 18.15% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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