Adobe (ADBE) is set to report second quarter fiscal 2018 earnings results after the closing bell Thursday.
For the quarter that ended May, Wall Street expect Adobe to report $1.54 per share on revenue of $2.16 billion, translating to year-over-year growth of 51% and 21.6%, respectively. For the full year, ending November, earnings are expected to rise 50% year over year to $6.46 per share, while full-year revenue of $8.84 billion would climb 21% year over year.
The company’s strong cloud execution, particularly in its Marketing Cloud segment where it competes with the likes of Oracle (ORCL) and Salesforce (CRM), has been nothing short of remarkable. Driven by large Marketing Cloud customers such as Verizon (VZ), UPS (UPS) and Pandora (P), among others, Adobe’s decision to focus on high-potential segments like enterprise services has paid significant dividends.
Elsewhere, the company’s Creative Cloud segments is witnessing better-than-expected subscription adoption among government and educational institutions. Still, for the shares to continue their strong momentum run, the San Jose, Calif.-based software giant on Thursday must deliver a top- and bottom-line beat, while issuing confident guidance.
Beyond the headline numbers, analysts will look for strength in gross margins, which should assuage concerns about the stock’s valuation. Wall Street will also focus on the company’s subscription growth as a sign of predictable revenue. Currently, some 90% of total revenues are now subscription-based. While that number might be tougher to grow, any sign of erosion may spook investors.
Finally, as of last quarter, the company had an impressive $4.3 billion in net cash, thanks to its surging cash flow rate (reached $1 billion in Q1). Can that figure continue to climb? And will management deploy that cash towards M&A or towards rewarding shareholders with a dividend — something analysts would love to see?
Despite the company’s solid cash, earnings and revenue position, bears are often quick to point out Adobe’s valuation, which has surpassed those of its software peers. Indeed, the stock, which has risen 47% year to date, including 8% over the past month, currently trades at 40 times fiscal 2018 estimates of $6.46 per share, which is more than twice the average stock in the S&P 500 Index.
At the same time, as I pointed out above, Adobe’s estimate of $6.46 per share calls for 50% year-over-year growth. Not many S&P 500 stocks are growing revenue at that rate, much less profits. And from my vantage point, given the company’s strong fundamentals, combined with its consistent execution, it would be a mistake to part with this winner today.