Jobs growth, strong retail sales, and high inflation will likely prompt the Fed to keep raising interest rates. Uncertainty surrounding potential rate hikes and the recent banking industry turmoil have induced immense pressure in the stock market lately, leading certain quality stocks to decline significantly in price.
Therefore, it could be the right time to scoop up shares of software giant Adobe Inc. (ADBE), which is currently trading at a discount to its historical valuation. Over the past month, the stock has declined 12.1%. However, it is well-positioned to witness a big rebound.
In terms of forward non-GAAP P/E, ADBE’s 21.83x is 41.2% lower than its five-year average of 37.13x. The stock’s forward EV/Sales of 7.86x is 41% lower than the five-year average of 13.33x. In addition, its forward EV/EBITDA and Price/Cash Flow multiple of 16.05 and 18.85 are 42.9% and 39.2% lower than the five-year averages of 28.09 and 31.00, respectively.
In this piece, I have discussed many other reasons why I am bullish on this software stock.
ADBE’s fiscal first-quarter results surpassed Wall Street estimates. The company reported revenue of $4.66 billion and adjusted earnings of $3.80 per share, beating analysts’ estimates of $4.62 billion and $3.68, respectively.
ADBE’s Digital Media segment, which includes its iconic Creative Cloud design software, generated revenue of $3.40 billion, topping the consensus estimate of $3.36 billion, according to StreetAccount. Also, its Digital Experience segment, which features its Marketo marketing software and other applications, accounted for $1.18 billion in revenue, just above the $1.17 billion StreetAccount consensus estimate.
Shantanu Narayen, ADBE’s Chairman and CEO, said, “Adobe drove record Q1 revenue and we are raising our annual targets based on the tremendous market opportunity and continued confidence in our execution. Creative Cloud, Document Cloud and Experience Cloud are mission-critical in fueling the global digital economy.”
ADBE expects adjusted EPS of $15.30 to $15.60, with $1.7 billion in net new annualized recurring revenue (ARR) from Digital Media. In December, the company expected $15.15 to $15.45 in adjusted EPS for the full year, with a net new Digital Media ARR of $1.65 billion.
Sustained demand for its product offerings, industry-leading innovation, and world-class operational rigor set the company to deliver another solid fiscal year.
Here is what could shape ADBE’s performance in the upcoming months:
Positive Recent Developments
On February 8, 2023, ADBE and Microsoft Corp. (MSFT) partnered to transform the future of digital work and life by bringing the industry-leading Acrobat PDF experience to more than 1.4 billion Microsoft Windows users in Microsoft Edge. ADBE’s Acrobat PDF technology in Microsoft Edge will be available to all Windows 10 and 11 users beginning in March 2023, with an opt-in option for organizations with managed devices.
This partnership between the two industry giants should expand their market reach and boost profitability and growth.
On October 18, 2022, ADBE shared the latest innovations for Adobe Express, the template-based web and mobile tool that lets anyone create, edit, customize, schedule, and share standout content. Moreover, workflows across Adobe Express and Creative Cloud apps deliver professional-looking content. Adobe Express reaches nearly 43 million K-12 teachers and students globally.
Also, in the same month, ADBE announced the expansion of collaboration tools with Adobe Creative Cloud and Document Cloud, allowing new workflows that empower creators to meet growing content demand across various platforms. Photoshop and illustrator introduced new share-for-review collaboration capabilities.
Solid Financials
In the fiscal first quarter that ended March 3, 2023, ADBE’s total revenue increased 9% year-over-year to $4.66 billion. Its net new Digital Media ARR came in at $410 million, exiting the quarter with a Digital Media ARR of $13.67 billion. The company’s Creative ARR rose to $11.28 billion, while Document Cloud ARR grew to $2.39 billion.
Furthermore, ADBE’s gross profit grew 9% year-over-year to $4.09 billion. The company’s non-GAAP operating income was $2.13 billion, up 6.9% year-over-year. Its non-GAAP net income increased 9% year-over-year to $1.75 billion. Also, its non-GAAP net income per share was $2.71, a 1.9% increase year-over-year.
Impressive Historic Growth
ADBE’s revenue has increased at a 16.4% CAGR over the past three years. During the same period, the company’s EBITDA and net income have grown at 18.6% and 17.2% CAGRs, respectively. Also, ADBE’s EPS and levered free cash flow have increased at CAGRs of 19% and 25.9%, respectively.
Favorable Analyst Estimates
Analysts expect ADBE’s revenue for the second quarter (ending May 2023) to come in at $4.77 billion, representing an increase of 8.8% year-over-year. The consensus EPS estimate of $3.79 for the same quarter indicates a 13.1% year-over-year increase. Moreover, the company has an impressive earnings surprise history as it surpassed the consensus EPS estimates in all four trailing quarters.
In addition, ADBE’s revenue and EPS for the fiscal year (ending November 2023) are expected to increase 9.6% and 12.9% year-over-year to $19.30 billion and $15.48, respectively. Also, analysts expect the company’s revenue and EPS for fiscal 2024 to grow 11.6% and 13.1% year-over-year to $21.54 billion and $17.50, respectively.
Robust Profitability
In terms of the trailing-12-month gross profit margin, ADBE’s 87.70% is 79.1% higher than the 48.97% industry average. The stock’s 34.64% trailing-12-month EBIT margin is 484.5% higher than the industry average of 5.93%. Likewise, its 27.01% trailing-12-month net income margin is 826% higher than the industry average of 2.92%.
Furthermore, ADBE’s trailing-12-month ROCE, ROTC, and ROTA of 32.97%, 19.98%, and 17.51% are significantly higher than the industry averages of 4.87%, 3.21%, and 1.56%, respectively.
POWR Ratings Show Promise
ADBE’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has a grade of A for Quality, in sync with higher profitability than its peers. In addition, it has a B grade for Sentiment, consistent with optimistic analyst estimates.
ADBE is ranked #20 out of 134 stocks in the Software-Application industry.
Beyond what I have stated above, we have also given ADBE grades for Growth, Value, Stability, and Momentum. Get access to all ADBE ratings here.
Bottom Line
ADBE reported outstanding fiscal 2023 first-quarter results, topping Wall Street expectations. The company also increased its full-year profit forecast. Strong demand for its offerings, continued and unparalleled innovation, and strategic partnerships and acquisitions position the company to capture numerous market opportunities in 2023 and beyond.
Given ADBE’s robust financials, high profitability, and solid growth prospects, we think investing in this software stock at the current discounted valuation could be wise.
How Does Adobe Inc. (ADBE) Stack up Against Its Peers?
ADBE has an overall POWR Rating of B. One could also check out these other stocks within the Software-Application industry with an A (Strong Buy) rating: Commvault Systems, Inc. (CVLT), IBEX Ltd. (IBEX), and eGain Corporation (EGAN).
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ADBE shares were trading at $348.32 per share on Thursday morning, up $14.71 (+4.41%). Year-to-date, ADBE has gained 3.50%, versus a 2.32% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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