How Analysts Are Chasing Adobe Targets Much Higher

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Adobe Systems Inc. (NASDAQ: ADBE) reported fiscal third-quarter 2016 results after markets closed Tuesday. Shares hit all-time highs following the report and investors were especially pleased. Analysts even took this opportunity to shine on Adobe as well, with most raising their price targets.

24/7 Wall St. has included some of the key highlights from the earnings release, as well as what analysts are saying after the report.

The software company reported adjusted earnings per share (EPS) of $0.75 on record revenue of $1.46 billion. In the same period of last year, the company reported adjusted EPS of $0.54 on revenue of $1.22 billion. Third-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.73 and $1.45 billion in revenue.

The company’s press release did not offer fourth-quarter or fiscal year guidance, but the company has posted both a presentation and a transcript of its comments for the quarterly conference call. Adobe expects fourth-quarter revenue of $1.55 billion to $1.60 billion and adjusted EPS of $0.82 to $0.89. The company also expects full-year revenue of $5.80 billion to $5.85 billion and adjusted 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.

Subscription revenue jumped from $829.1 million in the same quarter last year to $1.17 billion this year. Product sales fell from $275.34 million to $180.96 million. Including service and support revenue the company’s total revenue rose 20%. The company is simply selling more subscriptions, which in turn lifts gross profit and ultimately operating income. No big mystery really.

Merrill Lynch maintained a Buy rating for the stock with a $109 price objective. The brokerage 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.

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.

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.

JMP Securities maintained its Market Outperform rating but raised its price target to $120 from $106, believing that the company restored confidence after a noisy second quarter.

After the report, a few other analysts weighed in as well:

  • Cowen has an Outperform rating and raised its price target to $120 from $115.
  • 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.
  • 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.
  • 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.

Shares of Adobe were trading up nearly 7% at $107.48 on Wednesday, with a consensus analyst price target of $112.92 and a 52-week trading range of $71.27 to $108.18.

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