Adobe Systems Incorporated: Why ADBE Stock Could Climb Double Digits

ADBE StockAdobe Systems Incorporated (NASDAQ:ADBE) is confident about its growth prospects based on the fact that its businesses are performing very well. The company’s management is bullish that the strong momentum of ADBE stock will continue until the end of the year.

Adobe CEO Shantanu Narayen recently emphasized that the company remains a market leader, with exploding demand for its digital experience solutions. Wall Street analysts believe that ADBE stock would continue to outperform the market going forward.

Cloud Offerings Helping Adobe Stock

Adobe stock’s revenue from its “Digital Media” and “Digital Marketing” business segments climbed 26% to $943.1 million and 12% to $412.1 million, respectively, in the second quarter ended June 3, 2016. The strong performance of both segments slightly offset the weakness of its “Print and Publishing” segment, down 10% to $43.4 million, due to the relative strength of the U.S. dollar against European, Middle Eastern and African (EMEA) currencies during the quarter. (Source: “Form 10-Q,” Adobe Systems Incorporated, June 29, 2016.)

Adobe’s Digital Media segment ended 2Q with $3.41 billion in annualized recurring revenue (ARR), up by $285.0 million. Its strong growth was driven by the continued adoption and retention of its “Creative Cloud” and “Document Cloud” offerings across all customer segments.

Adobe’s Creative Cloud is now a one-stop shop for creators, from inspiration to monetization. It is the leader in the high-growth customer experience category. The “Adobe Document Cloud” also holds a leading position in the digital document service.

Adobe Stock Performance & Financials

Adobe stock has been delivering quarterly earnings and revenue that consistently beat or meet the consensus estimate of Wall Street analysts. In the June quarter alone, ADBE stock’s adjusted earnings of $0.71 per share were higher than the $0.68 consensus estimate. Adobe stock revenue increased 20% to $1.4 billion, which was in line with the expectations of analysts. (Source: “Adobe Reports Record Revenue,” Adobe Systems Incorporated, June 21, 2016.)

Over the past few quarters, the company’s profit and revenue were also impressive. Adobe achieved an average earnings growth rate of 10.34% and a revenue growth rate of 4.77% over the past four quarters. Market analysts believe that the company would again meet or surpass its earnings and revenue guidance for the third quarter.

The company expected to generate 3Q earnings of around $0.69 to $0.75 per share and revenue in the range of $1.42 billion to $1.47 billion. If Adobe stock reaches the high end of its revenue guidance, it could record another 20% sales growth.

When it comes to its equity performance, the company’s long-term investors have been rewarded with generous returns since its initial public offering (IPO) on August 20, 1986. ADBE stock went up 45,750% since it started trading.

ADBE stock gained more than 215% over the past 10 years, which is 307% over the previous five years or 26% over the past year. Adobe’s stock performance beat was better than the NASDAQ index, which was up eight percent over the past 52 weeks. (Source: “Adobe Systems Incorporated,” Google Finance, last accessed September 12, 2016.)

Adobe Is Pursuing Opportunities in AR/VR Market

Companies in the technology industry believe that virtual reality (VR) and augmented reality (AR) is the next big thing. Most of the leaders in the tech industry, including Adobe, are heavily investing in the VR/AR market.

Digi-Capital estimated that the combined AR/VR market would reach $120.0 billion by 2020. AR and VR are expected to disrupt the advertising, consumer apps, mobile devices, gaming, TV, and film industries—as well as theme parks, among other things. (Source: “Augmented/Virtual Reality to hit $120 billion disrupting mobile by 2020,” Digi-Capital,  last accessed September 12, 2016.)

The number of AR and VR users is expected to expand from five million this year to as many as 275 million by 2025. Adobe, just like other tech companies, wants to get a big slice of the AR/VR market. The company already boosted its AR and VR capabilities within “Adobe Primetime” to help brands with advertising and monetization once AR and VR become mainstream.

Adobe Primetime’s new capabilities include ad-driven monetization, focused on cinema and an immersive video virtual environment. The company allows brands to approach advertising through the different models it supports, including sponsored playback, traditional ad insertion, and complex ad insertion. The service also offers content protection through its Virtual Reality Digital Rights Management (VRDRM).

Adobe Primetime’s device support is initially focused on Samsung Electronics Co Ltd’s “Gear VR” and Google’s (Alphabet Inc (NASDAQ:GOOG)) “Cardboard” and later for Oculus VR, LLC.’s “Rift” and HTC Corp’s (TPE:2498) “Vive.” (Source: Adobe Announces VR and AR Capabilities in Marketing Cloud, Digital Marketing Blog, May 17, 2016.)

Most recently, the company announced additional innovations in the next release of its “Premiere Pro CC,” including auto-aware VR that detects and applies correct settings and monoscopic media seamlessly. (Source: “Adobe Unveils New Virtual Reality, Character Animation and 3D Innovations at IBC 2016,” Adobe Systems Incorporated, September 6, 2016)

The Bottom Line for Adobe Stock

Adobe is the unbeatable market leader in graphic design and creative software. The company is optimistic that it can deliver a solid financial performance until the end of the year. ADBE stock should continue to trade higher.

For the full fiscal 2016, the company expected its total revenue to be around $5.8 billion, non-generally accepted accounting principles (GAAP) earnings of approximately $2.80 per share, and Digital Media accounting rate of return (ARR) to be approximately $4.0 billion. Additionally, the company estimated its revenue from its Digital Media segment to grow more than 20% year-over-year. Its estimated revenue growth from its Adobe Marketing Cloud would be around 20%, and bookings approximately 30% year-over-year. (Source: “Adobe Financial Targets,” Adobe Systems Incorporated, June 21, 2016.)

Investing in ADBE stock looks safe and rewarding, based on the company’s consistent outstanding financial and equity performance. Take note that it has a robust balance sheet. It has $12.22 billion in total assets compared to its $4.97 billion total liabilities as of June 3, 2016. Its book value per share is $14.53.

Out of the 26 analysts covering ADBE stock, nine recommended an “outperform” rating, 12 suggested a “buy” rating and five had a “hold” rating as of September 9, 2016. Their highest price target for the stock is $125.00 per share, which is an increase of 25.8%. The average price target is $110.00, which is an upside of 10.7%.