Adobe Systems Inc. (NASDAQ: ADBE) released its fiscal third-quarter earnings report after markets closed Tuesday. Over the course of the week, the stock hit new all-time highs, and analysts took this opportunity to chase Adobe even higher, raising their price targets across the board.
The software company reported earnings per share (EPS) of $0.75 and record-breaking revenues of $1.46 billion. Thomson Reuters consensus estimates called for EPS of $0.73 and $1.45 billion in revenue. In the same period of last year, the company reported adjusted EPS of $0.54 on revenue of $1.22 billion.
In terms of guidance for the fourth quarter, the company expects revenues in the range of $1.55 billion to $1.60 billion and EPS between $0.82 and $0.89. The company also expects full-year revenues of $5.80 billion to $5.85 billion and EPS of $2.94 to $3.00.
The consensus estimates for the fourth quarter call for EPS of $0.78 on revenues of $1.57 billion. For the full year, analysts are looking for EPS of $2.87 on $5.81 billion in revenue.
Oppenheimer’s Brian Schwartz said:
Adobe’s fiscal third-quarter results were strong with upper echelon software industry growth rates showing across many metrics, which is impressive given Adobe’s size. There are few large-cap software companies generating consistently strong growth rates with improving operating margins, similar to Adobe’s third-quarter results, and this scarcity, along with management’s continuing ability to deliver good execution and EPS upside in quarterly reported results, lends support to its premium stock valuation. On balance, management’s muted fiscal 2017 and fiscal 2018 EPS guidance update of “don’t change EPS forecasts” despite roughly $0.14-0.20 EPS raise to fiscal 2016 guidance, raises some concerns on sales efficiency trends, but this is more likely management setting numbers properly to reduce estimate risks. Bottom Line: We believe the stock is fairly valued at current levels and prefer waiting on the sidelines for a better entry point.
Credit Suisse believes that these results and guidance are good but not great enough for a premium valuation. Despite the outperformance this quarter, management just reiterated its prior fiscal 2016 annual marketing cloud growth of over 20%. While the firm believes Adobe’s results and fiscal fourth-quarter guidance were generally good, just meeting expectations may not be enough for a large-cap software stock that trades at such a premium valuation, in its view.
That said, Credit Suisse continues to have a positive view on Adobe’s industry-leading stack of digital media and digital marketing assets, large market opportunity and skilled management team. However, the firm believes the current premium valuation on the stock already reflects the existing growth trajectory, but it sees a lack of near-term catalysts that would justify further multiple expansion beyond current levels.
The firm modestly increased its fiscal 2016 and fiscal 2017 revenue estimates to $5.831 billion and $7.065 billion from $5.821 billion and $7.053 billion, respectively. For the same periods, Credit Suisse also raised EPS to $2.97 and $3.86 from $2.86 and $3.75, respectively.
Merrill Lynch maintained a Buy rating for the stock with a $109 price objective. The firm gave its investment rationale for Adobe as follows:
It is leveraging its brand ubiquity — Acrobat, Creative Suite and Digital Marketing to sell technologies for design, production and marketing of digital media on the web. Strong user loyalty and product upgrades position Adobe well to command a large share in its end markets. We have high confidence in Adobe’s ability to ramp its recurring revenues as it grows its Creative Cloud user base and subscription revs in Dig Marketing and other businesses.
After the report, a few other analysts weighed in as well:
- Citigroup reiterated a Buy rating with a $117 price target.
- Canaccord Genuity has a Buy rating and raised its price target to $120 from $110.
- Pacific Crest has an Overweight rating and raised its price target to $122 from $110.
- Morgan Stanley has an Equal Weight rating but raised its price target from $100 to $110.
- Cowen has an Outperform rating and raised its price target to $120 from $115.
- Goldman Sachs has a Neutral rating and raised its price target to $112 from $104.
- Credit Suisse reiterated a Neutral rating with a $105 price target.
Shares of Adobe closed Friday at $107.47, with a consensus analyst price target of $118.46 and a 52-week trading range of $71.27 to $108.50. Over the course of the week the stock rose 8.6%.