by Ian Harvey
February 16, 2019
Adobe Systems Incorporated (NASDAQ:ADBE)
The San Jose, Calif.-based digital media and marketing software firm, Adobe Systems Incorporated (NASDAQ:ADBE), was recommended to our “Earnings Predictions Members” on Monday, December 10, 2018, based on a sound earnings report. However, members were advised to exit before the trade having already made potential profits of 112%.
And now, cloud stocks are back after suffering from the late 2018 market selloff. With stabilizing economic fundamentals in 2019, cloud stocks have come roaring back. Improving fundamentals and sentiment have helped the rebound in cloud stocks and demand in their services has grown, as they are seen both as the future and a way to cut costs amid slowing growth.
The rally in cloud stocks is still in the early stages; and considering that only 20% of enterprise workloads have shifted to the cloud, the rally is still in its infancy.
Adobe stock is up nearly 15% year to date through Friday's close. In 2018, it rose 29%. And in 2017, it soared 70%.
Adobe will report its fiscal first-quarter results on March 14.
Adobe operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. Its flagship product is Creative Cloud, a subscription service that allows customer to download and access the latest versions of its creative products.
Adobe stock price is still $20 below its highs; therefore, there is plenty of room for further growth. ADBE is now $50 up from its lows.
Virtually every freelancer and every business in online marketing utilizes Adobe to some capacity – therefore subscriptions are a winner. Adobe collects revenue from its users monthly which leads to a more stable business with more predictable cash flows and it’s exactly why its stock gets a premium in the market.
Adobe has little competition in the creative solutions business; which is a stable growth business with a huge moat and no competition, implying healthy revenue and profit growth for the foreseeable future.
Adobe is shaping itself into a cloud business with a unique value prop. Adobe's cloud solutions focus on experiences and visuals, and the company is leveraging its experience in visual-oriented solutions to create cloud solutions for companies looking to enhance their consumer's experience. As it does, Adobe's revenue and profits will move considerably higher.
After integrating Marketo, Magento, Tubemogul, and other acquisitions, Adobe is now seen as a leader in the still-emerging marketing-cloud space. As is often the case in tech, Adobe’s first- mover advantage in that area appears to be huge.
Revenue has doubled over the last five years while free cash flow (FCF) and cash flow from operations continue to coast from the lower left to the upper right. Over the last 12 months, Adobe has generated more than $4 billion in FCF. While Adobe does carry $4.1 billion in long-term debt, its total assets are double its total liabilities.
Adobe has averaged sales growth of 24% year-over-year for the past four quarters. Earnings-per-share growth has averaged 58% during that period.
Adobe last posted its quarterly earnings data on Thursday, December 13th. The software company reported $1.83 earnings per share for the quarter, missing the consensus estimate of $1.88 by ($0.05).
Adobe had revenue of $2.42 billion during the quarter, compared to analysts’ expectations of $2.43 billion. Adobe had a return on equity of 31.19% and a net margin of 28.69%. The business’s revenue for the quarter was up 20.6% compared to the same quarter last year. During the same period last year, the company earned $1.26 earnings per share. On average, sell-side analysts forecast that Adobe will post 6.21 earnings per share for the current year.
Brokerages expect that Adobe will post earnings per share of $1.61 for the current quarter. Adobe posted earnings of $1.55 per share during the same quarter last year, which suggests a positive year-over-year growth rate of 3.9%.
Also, equities research analysts forecast that Adobe will announce sales of $2.54 billion for the current quarter. Adobe reported sales of $2.08 billion in the same quarter last year, which suggests a positive year over year growth rate of 22.1%.
Adobe is scheduled to announce its next earnings results on Thursday, March 21st.
For the full year, the Consensus Estimates are projecting earnings of $7.77 per share and revenue of $11.15 billion, which would represent changes of +14.94% and +23.44%, respectively, from the prior year.
Before Adobe reported Q4 earnings in December, it issued its 2019 outlook in mid-October. Management reiterated that it was on track to hit its fourth-quarter numbers and it’s looking for 20% revenue growth in fiscal 2019. When it reported earnings in mid-December — a top- and bottom-line beat — Adobe updated its 2019 outlook to include its recent acquisitions.
Estimates call for full-year revenue of 28% and for earnings to swell 41.5% to $7.78 per share. Adobe isn’t just growing, it’s accelerating!
Recently, UBS analyst Jennifer Swanson Lowe reiterated her buy rating on Adobe stock with a 12-month price target of 310.
"The Adobe story has become more controversial in recent months," Lowe said in a note to clients. Investors are questioning the durability of its growth in annualized recurring revenue. They also are worried about expense growth implied in Adobe's fiscal 2019 earnings guidance.
Lowe said she has increased confidence in the sustainability of Adobe's annualized recurring revenue growth after a recent survey of customers by her firm.
Lowe believes operating-expense growth ticked up because of the company's acquisition of Marketo. But operating-expense growth should normalize in fiscal 2020, she said.
But as always, there will plenty of pessimism built in; and on Friday Cowen analyst Derrick Wood said he sees near-term and medium-term risks for Adobe in terms of business execution. He cut his price target to 280 from 300 and lowered its rating to market perform from outperform.
Several other analysts have recently commented on the company…..
Adobe has been given an average rating of “Buy” by the twenty-nine analysts that are currently covering the firm. Nine research analysts have rated the stock with a hold rating and twenty have assigned a buy rating to the company. The average 12 month target price among analysts that have updated their coverage on the stock in the last year is $285.00.
Adobe is still well-positioned, given its leadership in digital media creation software. It also has an increasing presence in marketing software and in the "digital transformation" trend.
Adobe is a big growth company that will keep growing at a big rate for a lot longer; which will push Adobe stock higher.
Adobe has a quick ratio of 1.13, a current ratio of 1.13 and a debt-to-equity ratio of 0.44. Adobe Inc has a 12 month low of $199.18 and a 12 month high of $277.61. The stock has a market capitalization of $126.54 billion, a P/E ratio of 46.75, and a price-to-earnings-growth ratio of 2.55 and a beta of 1.15.
Therefore, You may wish to consider this Trade……..
** OPTION TRADE: Buy ADBE JUL 19 2019 280.000 CALL at approximately $11.60
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An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!