Buying expensive shares in a company with a stellar reputation isn't always a losing proposition.
Revenue at Adobe Systems has grown, while the company has maintained free cash flow, gross margins and profitability.
On Thursday, Adobe Systems will release fiscal fourth-quarter earnings. Will the company maintain its momentum and surpass expectations?
If Adobe Systems achieves these results, it would be yet another quarter of stellar outperformance.
The company has said that it expects quarterly revenue of $1.55 billion to $1.6 billion and earnings of 83 to 89 cents a share.
On the other hand, Adobe Systems could well see a Netflix-like situation.
Adobe Systems has so far been driven by uninterrupted innovation in the creative and marketing cloud businesses. Sustained conversion of enterprise customers into license buyers, a compelling product line and above-average balance sheet capabilities have helped Adobe Systems consistently deliver profit and sales growth.
However, lower-end market demand, increasing competition from Apple and Microsoft and exposure to Europe could pose problems for Adobe Systems.
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Consider streaming company Netflix. The company was flying high, but then subscription growth went south.
Enterprise software is largely different from consumer-focused streaming services, but betting blindly on Adobe Systems at this juncture is probably too optimistic.
If Adobe Systems doesn't impress investors with its 2017 guidance or indicate sluggish booking scenarios, there could be a sharp and swift correction.
Nevertheless, investors shouldn't become too bearish on Adobe Systems, no matter what its results show. The chances of a minor blip are real, but Adobe Systems is here to stay.
The company's shift toward building annual recurring revenue has already laid a path for dependable growth that should continue for quite some time.
Meanwhile, the company's focus on building subscription-based recurring revenue is different from that of Facebook, which lacks the comfort of license revenue. This is where Adobe Systems and Microsoft score against the social-media giant.
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If Adobe delivers disappointing results, investors should wait for a pullback to buy the stock.
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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.