Adobe Systems Incorporated (NASDAQ:ADBE) is slated to report Q3 earnings after the close of trading. I am here to tell you the company is a buy both before and after it reports. The company is situated at the forefront of accelerating trends that promise to deliver double-digit growth over the next five years at least. Not only is Adobe a cloud-based business serving the needs of consumers and businesses alike.
The services Adobe offers are unique in that they allow creative applications of digital media including but not limited to e-publishing. In today’s environment, every business on the planet needs creative digital solutions to drive brand awareness, capture sales, and deliver results. In the scheme of cloud-based computing and business needs, Adobe is a perfect complement to services offered by AWS, Salesforce.com (NYSE:CRM), Zscaler (NASDAQ:ZS), and VMware (NYSE:VMW).
The Expectations Are High, But Not High Enough
The consensus outlook for fiscal Q3 earnings is high but not high enough I think. Revenue is expected to grow 11.7% on a YOY basis to $3.16 billion and EPS 17.6% to $2.41. EPS growth will be boosted by margin expansion at the gross and operating level. Digital Media ARR is expected to run near $9.5 billion.
Looking back over the past two years Adobe has beaten consensus for EPS 100% and revenue 88% of the time so there is a precedent. Adobe typically outperforms all but the most bullish of expectations and more analysts than not have been lower their EPS targets. Over the past three months, despite obvious strength from Adobe peers, 17 of the 23 analysts covering the stock have lowered their EPS target setting the market up for a potentially big surprise.
The Analysts See A Durable Opportunity In Adobe
Not one but four separate analysts issued positive commentary along with an upgrade or price-target hike over the past week. The takeaway for me is the two common themes among the notes. Not only is Adobe expected to benefit from the pandemic tailwind, the analysts believe its growth is durable and driven by multiple trends.
- Morgan Stanley (NYSE:MS) - Morgan Stanley upped its price target from $450 to $560 citing a “durable growth profile in digital media combined with improving efficiencies” that could drive a series of EPS revisions over the coming quarters.
- BMO Capital - BMO Capital raised its price target from $440 to $535 citing improving demand trends within the business community. According to them, Adobe has long-term growth durability. The consensus outlook for growth is in the 15% to 20% over the next two quarters and then slows to near 10% by mid-year 2021.
- Cowen - Cowen upgraded Adobe from Market Perform to Outperform and raised its price target. The price target was raised from $440 to $555. Analysts at Cowen say the rebound in activity and work-from-home trends have “opened up new types of enthusiast while also strengthening existing market demand." Multiple tailwinds are in place to drive “more favorable” EPS growth.
- UBS - Analysts at UBS upped their price target to $540 from $450 citing the pandemic tailwind, bolstered demand, and attractive valuations. Trading at 49X this year’s earnings the stock is no bargain but trading well below peers like Salesforce.com, Autodesk (NASDAQ:ADSK) and ServiceNow (NYSE:NOW). Those stocks are trading in the range of 60X to 100X this year’s earnings.
The Technical Outlook For Adobe Is Bullish, Double-Digit Gains Are In-Store
The technical outlook for Adobe is bullish and there are double-digit gains in store, but there is also some risk. If Adobe does not impress the market enough shares could continue the correction that began two weeks ago. In that scenario, price action could fall back to recent lows near $465 but I think that would be the extent of the losses. Even if Adobe only reports in line with consensus it is still looking at 15% to 20% growth over the next two quarters and at least double-digit growth over the next several years. A touch to $465 might be enough to trigger the next move higher.
In the case that Adobe is able to impress the market and move higher following earnings there is a chance resistance at the $525 level will cap gains. A move above $525 would be another trigger for entry. In either case, Adobe represents a significant bargain relative to other cloud stocks at its current price. A small purchase before the release isn’t a bad idea, it can always be added to later, depending on what the next signal is.
