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Adobe (ADBE) Stock Spikes on Q2 Earnings Beat: Should You Buy?

Christopher Vargas

Adobe Systems ADBE reported second quarter earnings after the closing bell on Tuesday. The company was able to beat the Zacks Consensus Estimate by five cents a share with a reported $1.83 EPS, up 10.2% from the same quarter the previous year. This EPS surprise of +2.81% sent shares up over 4% after market close. In addition, Adobe reported quarterly revenue of $2.74 billion that was also able to beat our consensus estimate. The company’s digital media segment rose 22% to $1.89 million.

Adobe was, in part, able to achieve this strong quarterly report after switching their company focus to the fast-growing cloud business. Adobe posted a cloud subscription increase of 27.7% bringing in revenue of $2.46 billion. However, Adobe faces some fierce competition in this market from tech giants like Microsoft MSFT, Oracle ORCL, and Salesforce.com CRM. In March, Adobe partnered with Microsoft in an attempt to boost its marketing software capabilities. The strong quarter comes as the company is up over 27% year-to-date, outperforming the broader software market.

 

Going Forward

Despite a strong outing for the quarter, the company’s revenue guidance for next quarter was a bit under what analysts were looking for. Adobe is expecting earnings of $1.95 per share with revenue of $2.80 billion, which was lower than what analysts polled by Refinitiv expected.

Adobe CEO Shantanu Narayen stated in a conference call that the software company picked up some new business from Amazon AMZN. Narayen also said that they would continue their first half momentum into the second half of the year. Adobe’s shift to cloud-based subscriptions brings in a more predictable revenue stream for the company; it allows the company to sell their software through web-based subscriptions instead of selling through packaged licensed software. With the way modern markets have switched to digital sales, this adjustment could prove to further the company’s development within a constantly changing industry.

Bottom Line

Adobe is currently a Zacks Rank #3 (Hold). The stock has a Style Score of F, as it is currently trading at 35X its forward earnings, which is above the industry average. The stock’s P/CF (price-to-cash-flow) of 43.5 also indicates the company is currently trading at a much higher price than the rest of its industry peers.

On the other hand, Adobe has a Style Score of B in Growth. According to Zacks Estimates, Adobe has projected EPS growth of 15.59% as well as a projected sales growth of 23.45% for the current fiscal year. Both metrics surpass industry averages, distinguishing the stock as a true growth prospect within the industry.

Adobe can also attract momentum seeking investors, as the stock is currently listed with a Zacks Style Score of A for Momentum. The software stock has a 12-week price change of +4.21% and has gone up over 5% today setting a new 52 week high. The company’s 20-day average volume is over 2 million, and its recent quarterly success are more than enough to cater to momentum-based investors. If investors can look past the company’s current inflated valuation, then there seems to be some light at the end of the tunnel for Adobe.

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