Technological innovations and the rising adoption of digitized solutions are expected to help the software industry thrive in the foreseeable future. As per Gartner, software will continue to be the highest-growing segment, with spending on software growing 12.3% in 2023.
Given this backdrop, let us find out whether software maker company Adobe Inc. (ADBE) could be an ideal portfolio addition or not.
ADBE is a diversified software company worldwide that operates through three segments: Digital Media; Digital Experience; and Publishing and Advertising.
The company has pioneered numerous Artificial Intelligence (AI) innovations for quite some time, introducing hundreds of Adobe Sensei intelligent features across Creative Cloud, Document Cloud, and Experience Cloud, enabling customers to create, work and collaborate more efficiently.
ADBE’s chair and CEO, Shantanu Narayen, said, "Adobe’s ground-breaking innovation positions us to lead the new era of generative AI given our rich datasets, foundation models and ubiquitous product interfaces."
Moreover, for the fiscal second quarter of 2023, ADBE’s net new digital media Annualized Recurring Revenue (ARR) was $470 million, while creative ARR grew to $11.64 billion and document cloud ARR grew to $2.50 billion.
The company’s executive vice president and CFO Dan Durn, believes that such notable results in the second quarter have positioned them to raise their annual targets.
Hence, for the fiscal year ending 2023, the company expects its total revenue to be between $19.25 billion and $19.35 billion, while its non-GAAP EPS is expected to come between $15.65 and $15.75.
The stock has gained 39.9% over the past six months and 28.6% over the past month to close the last trading session at $477.48. Wall Street analysts expect the stock to reach $547.26 in the upcoming 12 months, indicating a potential upside of 14.6%.
Here are the factors that could influence ADBE’s performance in the upcoming months:
Robust Financials
For the fiscal second quarter that ended June 2, 2023, ADBE’s total revenue increased 9.8% year-over-year to $4.82 billion. The company’s gross profit increased 10.3% from the year-ago value to $4.24 billion. Its non-GAAP operating income increased 10.4% year-over-year to $2.18 billion.
Its non-GAAP net income increased 13.2% year-over-year to $1.79 billion. In addition, its non-GAAP income per share came in at $3.91, representing an increase of 16.7% year-over-year.
Furthermore, its cash and cash equivalents for the quarter stood at $5.46 billion, up 62.1% from the year-ago value. The company’s total current assets came in at $9.27 billion as of June 2, 2023, compared to $8.99 billion as of December 2, 2022.
Attractive Valuation
In terms of forward EV/EBITDA, ADBE is trading at 22.87x, 17.2% lower than its five-year average of 27.61x. Its forward EV/Sales and Price/Sales multiple of 11.40 and 11.53 are 13.3% and 12.7% lower than its five-year averages of 13.15 and 13.21, respectively.
Solid Historical Growth
ADBE’s revenue has grown at 15.2% and 17.8% CAGRs over the past three and five years, respectively. Moreover, its EBIT and net income grew at 18% and 9.5% CAGRs over the past three years, respectively.
Impressive Profitability
ADBE’s trailing-12-month net income margin of 26.34% is significantly higher than the industry average of 1.97%. Likewise, its trailing 12-month ROCE, ROTC, and ROTA of 33.68%, 20.61%, and 17.44% are significantly higher than the industry averages of 0.50%, 1.66%, and 0.02%, respectively.
Favorable Analyst Estimates
The consensus EPS estimate of $3.98 for the fiscal third quarter (ending August 2023) and $15.71 for the current year (ending November 2023) indicate 17% and 14.6% year-over-year increases, respectively.
Likewise, the consensus revenue estimates for the same periods of $4.87 billion and $19.33 billion reflect improvements of 9.9% and 9.8% year-over-year, respectively. Moreover, ADBE topped consensus EPS estimates in all the trailing four quarters, which is impressive.
POWR Ratings Reflect Promising Outlook
It is no surprise that ADBE has an overall B rating, equating to Buy in our POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has a grade A for Quality, consistent with its strong profitability.
In addition, its B grade for Sentiment is justified by its favorable analyst estimates.
ADBE ranks #18 in the 135-stock Software - Application industry.
Beyond what we have mentioned above, to see the ADBE’s additional POWR Ratings for Growth, Value, Momentum, and Stability, click here.
Bottom Line
The increased adoption of digitalization and emerging trends in technology, such as AI, Machine Learning (ML), and the Internet of Things (IoT), has raised the growth prospects of the software industry.
Besides significant industrial tailwinds, ADBE’s unique ability to deliver top and bottom-line growth while investing in groundbreaking innovations sets the stage for the company to capitalize on massive market opportunities. Given its robust fundamentals, this stock could be a wise portfolio addition now.
How Does Adobe Inc. (ADBE) Stack Up Against Its Peers?
While ADBE has been rated B, equating to Buy, one can check out these other stocks within the Software - Application industry: eGain Corporation (EGAN), Commvault Systems, Inc. (CVLT), and IBEX Ltd. (IBEX), which have an A (Strong Buy) rating.
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ADBE shares were trading at $476.38 per share on Thursday morning, down $1.10 (-0.23%). Year-to-date, ADBE has gained 41.56%, versus a 14.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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