Adobe: Stock Marches Forward With Another Record Quarter

Sep. 16, 2018 8:26 PM ETAdobe Inc. (ADBE)SPY6 Comments

Summary

  • Adobe's all-around earnings beat was the eighth consecutive one, and the company does not cease to impress me.
  • Pricing seems to have played a role in gross margin that expanded 138 bps YOY, and contained opex helped to create noticeable op leverage.
  • I believe this GARP stock will continue to climb at a relatively steady pace for at least a few quarters to come.
  • This idea was discussed in more depth with members of my private investing community, Storm-Resistant Growth . Get started today »

Adobe Systems (NASDAQ:ADBE) does not cease to impress me.

This Thursday after the closing bell, the San Jose-based software company delivered its eighth straight all-around beat. Better yet, guidance for a traditionally strong fiscal 4Q came an inch ahead of consensus, in what now seems to me like a reoccurring game of anchoring expectations at current levels and beating them three months later.
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Credit: Extreme Tech

Revenues of $2.29 billion landed precisely at my more aggressive estimate. As I noted in my earnings preview, the guided 22% top-line growth that would have represented the smallest revenue increase since early 2017 looked too conservative for my taste, considering the minor uplift from Adobe's recent acquisition. In fact, the same seems to hold true for the upcoming quarter. The guided 20% growth coupled with an estimated minimum $30 million in Magento sales (about 150 bps in YOY total company revenue increase) appear to suggest a noticeable deceleration in organic growth in fiscal 4Q18 that I find unlikely to materialize.

The three-cent upside to my more aggressive fiscal 3Q18 EPS estimate began to take shape in the form of significantly better gross margin: 87.1% vs. 85.7% last year. The results confirmed my expectation for improved ARPU on the digital media side, which has been driven by a higher mix of standard-to-promotional pricing and price hikes in the U.S. for products like Lightroom, Spark and others.

Opex ex-SBC came in below my expectations on an absolute and relative-to-revenue bases, which I estimate to have caused a three-cent positive impact to my EPS forecast. It looks like the slightly richer integration expenses that I expected to see this time did not materialize. Adobe took advantage of its increasing scale to create operating leverage and deliver record levels of net income that I believe could reach $1 billion per quarter, non-GAAP, by

ChartADBE PE Ratio (Forward) data by YCharts

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This article was written by

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Tracking Economic Inflection Points To Guide Your Asset Allocation Strategy

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Disclosure: I am/we are long ADBE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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