Adobe (ADBE) stock has risen 23% over the past six months, compared to the 11% rise in the S&P 500 index. The software giant is benefiting from the massive secular digitization trend that is poised to remain hot over the next two years.
The digital cloud giant giant is set to report fourth quarter fiscal 2021 earnings results after the closing bell Thursday. The question is about the year term, particularly when looking at the strong comparisons Adobe is coming up against. That’s one of the questions on the minds of investors as the stock is trading near 52-week highs. For example, after averaging 23% revenue growth in its previous three quarters, revenue is expected to rise just 15% for all of fiscal 2022. That said, the company’s product offering remains a key differentiator from potential competitors.
Adobe's Digital Media segment, its biggest business unit which encompasses Photoshop, After Effects, Adobe Acrobat and Adobe Sign, accounts for 74% of its total business as of Q3 2021. Meanwhile, the company’s smaller segment, its Document Cloud business, accounts for 13% of total revenue and grew by 31% year over year last quarters. This remains a massive opportunity for Adobe, in addition to its Digital Experience segment, which includes Adobe's analytics and commerce units (Magento and Marketo).
Just as noteworthy, Adobe’s profit margins has steadily risen during this transition as the subscription business — for both its Digital Media and Digital Experience segments — eliminating the need for periodic software upgrades. While the stock is not cheap today, it doesn’t appear as if it will get cheaper given the company’s many growth catalysts. Investors, nonetheless, want to know: Are more stock gains ahead for Adobe or is now the time to take profits off the table?
For the quarter that ended November, Wall Street expect the San Jose, Calif,-based company to earn $3.20 per share on revenue of $4.09 billion. This compares to the year-ago quarter when earnings came to $2.81 per share on revenue of $3.42 billion. For the full year, earnings are expected to rise 23.5% year over year to $12.48 per share, while full-year revenue of $15.76 billion would climb 22.5% year over year.
The company is benefiting not only from rising profit margins during its transition to a cloud-based subscription services business within both its Digital Media and Digital Experience segments, but also from strong consumer demand. What’s more, Adobe has established a strong moat around its digital products, namely Creative Cloud, what allows it to enact timely price increases in a manner that will keep its loyal customers happy. To date, this has proved to be a working strategy.
In the third quarter, the company beat on both the top and bottom lines, delivering record quarterly revenue of $3.94 billion, up 22% year over year, beating estimates by $36 million. Q3 adjusted EPS rose 21% year over year to $3.11, thanks to strong year-over-year performance the Digital Experience segment. During the quarter, Subscription revenue was up 24% to $3.66 billion, while gross profit jumped 24% year over yea to $3.47 billion, up from $2.8 billion a year ago.
Given the company generated $985 million in Digital Experiences revenue, up 26% year over year, it’s safe to say that Digital Experiences — segment helps businesses automate their marketing and maximizes customer reach/adoption — is poised to become the company’s next billion-dollar business on a quarterly basis. On Thursday investors will want to see what Adobe can do for an encore.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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