With a 63% surge in the past six months, Adobe (ADBE) ranks highly in the basket of software stocks that have surged thanks to the the momentum provided by artificial intelligence. But how much more runway does the stock have left?
This question will be answered when the digital cloud giant giant reports third quarter fiscal 2023 earnings results after the closing bell Thursday. Even more impressive is the fact that Adobe's shares have surged 67% year to date, crushing the 16% rise in the S&P 500 index. But there’s more gains to come, according to Mizuho Securities analyst Gregg Moskowitz who last week boosted his price target to $630 from $520, while raising his rating on Adobe to Buy from Neutral.
From current levels of around $560, Moskowitz’s new price target assumes additional premiums of close to 15%. To justify his bullishness, Moskowitz noted Adobe’s accelerated web traffic which he expects will boost Adobe’s digital media segment annual recurring revenue in both the third and fourth quarters. Moskowitz also noted that the early reception to Firefly, Adobe's generative artificial intelligence product, has been "stronger than anticipated" and could result in it being a "significant" growth driver.
Moskowitz is not alone in his bullishness. Citing generative AI tailwinds, Wells Fargo analyst Michael Turrin also believes that Adobe is well-positioned to benefit from early enterprise adoption given its content specialties. Adobe management, meanwhile, continues to take the strategic approach to the position the company for long-term success. While the stock is no longer cheap, Adobe's new leadership position in AI will keep the shares from getting any cheaper.
For the quarter that ended August, Wall Street expect the San Jose, Calif.-based company to earn $3.98 per share on revenue of $4.88 billion. This compares to the year-ago quarter when earnings came to $3.40 per share on revenue of $4.43 billion. For the full year, ending in November, earnings are expected to rise 15% year over year to $15.73 per share, while full-year revenue of $19.34 billion would climb 9.6 % year over year.
Adobe's foray into the realm of generative AI that has investors buzzing with excitement. In their quest to elevate product offerings and enhance the user experience, Adobe has introduced game-changing features such as Firefly and Generative Fill. In a bid to expand Firefly's horizons and unlock greater user engagement, Adobe ventured into a strategic partnership with Alphabet's Bard AI language model.
Firefly is poised to amplify and spotlight text-to-image capabilities within Bard, providing users the ability to articulate their creative musings in their own words and effortlessly generate Firefly images directly within Bard's domain. Thus far, Adobe's execution has been nothing short of stellar as evident from its second quarter results. During which it beat on both the top and bottom lines, reporting Q2 adjusted earnings of $3.91 per share on $4.82 billion in revenue, topping estimates of $3.79 per share and $4.77 billion in revenue.
The company also raised its full-year revenue outlook, as it now expects full-year revenue to come within a range of $19.25 billion to $19.35 billion, rising from a prior range between $19.1 billion and $19.3 billion. The company continues to benefit from strong new user adoption and subscription revenue, now expecting full-year Digital Media net new annual recurring revenue to be approximately $1.75 billion.
Owing to its well-diverse software portfolio, Adobe rakes in a substantial 90% of its revenue through subscription-based products, particularly its twin pillars of operation: Digital Media and Digital Experience. On Thursday the market will want to see whether Adobe can build on these strong numbers and whether the company’s AI ambitions can bear fruit.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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