Adobe (ADBE - Get Report) is on track to sustain a 20%+ EPS compound annual growth rate bump over the next three years, according to a new Morgan Stanley note that upgrades the stock to overweight from equal-weight.
The firm also raised the company's price target to $340 from $282. Adobe shares closed Friday's session at $281.96, meaning the stock has a potential 21% upside from that level.
Adobe was climbing 2.7% Monday.
"Within a software universe where hyper growth stories screen very expensive, we find much more attractive risk/rewards in durable EPS growth stories. Limited visibility into components of the Digital Media business (70% of revenue) has historically left us cautious on making a call on the multi-year durability of Adobe's growth," analyst Keith Weiss said. However, "our
field work at the recent Summit conference, meetings with management and our analysis of
segment contribution margins (see below) bolster our confidence in Adobe's ability to sustain 20%+ EPS growth, even assuming decelerating Digital Media growth."
The firm says it has three primary disagreements with the consensus view on Adobe.
First, Morgan Stanley says that the company's digital media arm will probably decelerate at a faster pace than Wall Street expects, there are subscription model dynamics that will offset that deceleration.
Secondly, the firm is bullish on the company's digital experience and believes that the segment could sustain revenue growth above estimates.
Finally, Morgan Stanley believes that the company's revenue growth and margin expansion should sustain that 20%+ EPS CAGR through fiscal 2021. The firm also believes that this fact is not priced in at current valuation levels.