Adobe Systems Incorporated (NASDAQ:ADBE) stock has soared over the last few years, as the company has transitioned to a subscription-only model for its software. ADBE stock has gained an impressive 167% in the last five years. But since the start of the year, the general market malaise on tech stocks has brought ADBE stock down about seven percent, which could provide an opportunity for investors ahead of earnings later this week.
Adobe is set to report its first-quarter earnings on Wednesday, March 17. With a trailing price-to-earnings (P/E) ratio of 70, there is little room for error, as investors are quite optimistic about its future.
And they have good reason to be. In the last quarter, Adobe beat analyst expectations with record quarterly revenue of $1.31 billion, up 22% from the previous year. Plus, 2015 was a record year for the company as well, with revenue of $4.8 billion, representing 16% growth over 2014.
So what is driving this growth for Adobe?
In 2013, Adobe made the decision to move its core product, the “Creative Suite” (which includes software such as “Photoshop,” “Illustrator,” “Dreamweaver,” and “After Effects”) to the cloud. The new product, called “Creative Cloud,” is based on a monthly subscription model.
The big question investors were asking was whether existing customers were willing to switch from paying a software license to paying a monthly fee. Revenue took a hit in 2013, but the move seems to be paying off for Adobe.
Creative Cloud growth is exploding, with each quarter adding more net new subscriptions than the previous quarter. In 2015, Adobe added about 2.71 million new subscribers, bringing its total to 6.17 million, which is up about 78% over the previous year.
Subscriber growth is, of course, having a positive impact on revenue. Adobe’s subscription revenue for 2015 rose about 55% over the previous year to $3.2 billion, which drove earnings per share to rise about 61% over the previous year. Subscription revenue accounts for 68% of all revenue for Adobe, which mostly comprises the Creative Cloud business segment, so you can see why cloud growth is so important.
Selling a monthly subscription also means Adobe has a reliable revenue stream. And since Adobe no longer sells the Creative Suite on discs, the company saves even more on packaging and distribution costs.
The Bottom Line on ADBE Stock
Adobe’s earnings took a huge hit in 2013 and 2014, but that was due to the transition to a subscription-based business model. With that transition now mostly over, Adobe earnings are taking off. In 2015, earnings grew 133% over the previous year.
The Creative Cloud business segment is going to be the main growth driver going forward for Adobe. The company is forecasting that sales for the segment will hit $8.3 billion by 2018.
At earnings on Thursday, investors will be looking to see if Creative Cloud subscription growth is still accelerating. If Adobe manages to beat expectations, expect ADBE stock to soar.