In the second quarter of fiscal year 2016, software-maker Adobe (ADBE) - Get Report recorded its ninth consecutive quarter of revenue growth attributable to growing adoption of cloud-based software tools.
Yet, investors were unimpressed and Adobe's stock slipped post the earnings announcements. Here's why Adobe could be a growth stock gem that outperforms the market this year.
On Wednesday, a day after results were announced, the stock traded nearly 5% lower, ending the day at $94.01 a share. One of the prime reasons for this fall was the company's expectation for third-quarter revenue to come in below analyst estimates of $1.47 billion to a range of $1.42 billion and $1.47 billion. However, it seems premature for investors to be disappointed with Adobe.
For starters, Adobe has had a history of beating analyst estimates on earnings by a sizeable margin for at least the last four quarters.
Strong Start to the Year
In the first quarter of the fiscal year, Adobe registered revenues of $1.38 billion, up nearly 25% over the previous year. Both first quarter earnings and revenue were above the higher end of Adobe's guidance range for the first quarter.
With the favorable start seen in its cloud business, Adobe increased its full year revenue guidance to $5.8 billion from $5.7 billion earlier and adjusted earnings per share to $2.80 from $2.70. This guidance positions the stock for outsized gains in a volatile and risky market.
Setting New Records
In the most recent quarter, the maker of Photoshop even set some new records. The digital media segment's revenue rose 26% on year to a record $943 million, with a 37% increase in creative revenue to $755 million.
With Adobe marketing cloud revenue up 18% on year to $385 million, it was also a new record for Adobe.
Beyond the Cloud
Adobe's recent performance might be firmly resting on its cloud offerings, but the company is also ensuring that it is the brand of choice when it comes to other offerings like Adobe Experience Manager Mobile that helps user in building and managing content-centric enterprise applications.
Earning validation for the same, tech research firm Gartnerpronounced Adobe as a Leader in the 2016 Magic Quadrant for Mobile App Development Platforms research report. The report ranks the company highly in market understanding, marketing strategy, sales strategy, offering (product) strategy, business model, vertical/industry strategy, innovation and geographic strategy.
The San Jose-based company has also upped its game on video software through the latest update to its video editing software, Premiere Pro. The software is now better equipped with new tools to edit 360 degree video and stereoscopic VR video.
The upshot: Abobe boasts attractive long-term potential.
In terms of stock price appreciation, even after the more than 15% rise over the past one year, a median estimate of Thomson Reuters consensus analysts expects another 17% upside to stock prices over the next 12 months.
With a forward price/earnings ratio of 24.7-times, Adobe may be more expensive than peers like Apple at 10.4-times and Microsoft at 17.4-times, but if we look at earnings projections for the next five years, Adobe is expected to grow at a solid 28.2%, far outpacing Apple (9.23%), Microsoft (8.15%), the industry (17.1%) and even dwarfing the S&P 500 (7.4%).
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.