On earnings day, Adobe (ADBE - Get Report) failed to impress investors once again. The stock pulled back by as much as 4% in after-hours trading Tuesday, briefly returning to early October 2018 levels of less than $275 per share. But arguably, not much about the fiscal third quarter financial results disclosed after the closing bell seemed worrisome enough to justify the bearish reaction.
Quarter Was Stronger Than Expected
In every major segment, except for the minuscule publishing business that accounted for only 2% of total revenues, Adobe delivered growth rates of at least 21% and at least achieved, if not exceeded, all its top-line targets. Total sales of $2.83 billion largely met consensus expectations but not surprisingly so, since the bulk of the company's revenues come from highly-predictable subscription services.
The software company seems to have benefited from the same tailwinds that have propelled revenues forward by at least 20% in each of the past sixteen quarters. More specifically, Adobe continued to innovate on product offerings, especially in what pertains to mobile platforms. As the company gains scale, expanding into different client verticals and digital solutions, cross-selling opportunities continue to be captured. No less importantly, M&A keeps playing a role in producing inorganic growth, as the acquisitions of Marketo and Allegorithmic have yet to reach their one-year anniversary date.
If one caveat could be added about an otherwise robust quarter, Adobe seems to be suffering some growing pains on the higher-growth experience cloud side of the business. The new experience platform has been developed recently and from scratch, while Marketo has yet to be fully integrated into it. As a result, bookings hiccuped in the third quarter, although the management team seemed confident that a rebound is already in the works for the last period of the fiscal year.
It was also encouraging to see adjusted op margins expand year-over-year by 34 basis points to just north of 40% once again. In part due to the shifts in experience cloud and the needed organizational re-alignment, profitability had taken a hit in the first half of 2019. Back on the rise now, margins should benefit from a heavier mix of subscription revenues and growth in the mid-market client segment.
Keeping A Long-Term View
To be fair, some of the cautious stance towards the stock following Adobe's earnings report could be justified by a fiscal fourth quarter guidance that lagged expectations by a small margin. Total revenues are projected to grow at a 21% pace that is about two percentage points lower than consensus estimates. Also, adjusted EPS guidance of $2.25 fell a nickel short of analysts' projections.
But it is worth noting that Adobe has traditionally guided low only to beat consensus across the board three months later, suggesting conservatism by the executive team when communicating its outlook. This has been the case in each of the past twelve quarters. More importantly, there are few, if any, indications that Adobe's top- and bottom-line growth pace should scale back significantly in the foreseeable future, considering the numerous opportunities that seem to lie ahead.
Adobe is a tech name that checks most "buzz word" boxes in the tech space. It is a undisputed leader in digital asset creation and digital marketing expanding further into cloud-based solutions and customer data analytics. In addition, the overwhelming mix of SaaS revenues should increase visibility into top-line growth and produce margin expansion, as the company continues to scale.
With the stock trading at a projected current-year P/E of just over 35 while the company is expected to grow EPS at a respectable 25% pace next year, Adobe looks like a compelling growth stock to own at current levels -- especially if post-earnings bearishness takes hold during the Wednesday session.