Skip to main content

In the second quarter of fiscal year 2016, software-maker Adobe (ADBE) recorded its ninth consecutive quarter of revenue growth attributable to growing adoption of cloud-based software tools.

The company exceeded analyst expectations (and even its own guidance range) on adjusted earnings per share by three cents or 4.4%, but delivered in line with estimates for revenues.

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.

Image placeholder title

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.

Scroll to Continue

TheStreet Recommends

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%).

Apple is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells AAPL? Learn more now.


Spooked by Brexit and the global free-fall in stocks? If you'd rather avoid stocks altogether while the market experiences its current turbulence, I know a way you can make a guaranteed $67,548 over the next 12 months. In fact, this technique is so successful and simple, you might want to give up stock investing forever. Click here now to learn more.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.