Popular software company Adobe (ADBE) posted strong revenue and earnings growth for the third quarter, and the company expects this growth to continue in the coming quarters. The major acquisition of Figma is expected to significantly boost future growth. Investors who think they missed purchasing this stock can still invest in it given its upside potential. Read more….
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Software giant Adobe Inc. (ADBE) recently released strong third quarter results, with earnings per share beating the consensus estimate. The company provides products and services that professionals, marketers, knowledge workers, application developers, enterprises and consumers use to create, manage, measure, optimize and engage compelling content and experiences.
In the third quarter, ADBE’s digital media business reported revenue of $3.23 billion and net new digital media Annual recurring revenue (ARR) came in at $449 million. Total digital media ARR exiting the third quarter grew to $13.40 billion. In addition, the Experience Cloud division had $1.12 billion in revenue and $981 million in subscription revenue.
Last month, the company announced the acquisition of Figma. ADBE expects to close the deal in 2023. Figma has a total addressable market of approximately $16.50 billion by 2025; this is expected to significantly boost ADBE’s sales.
However, the US Department of Justice is preparing to investigate the deal over antitrust matters and has reached out to customers and competitors of both companies and Figma’s venture capital investors. ADBE has vehemently denied that Figma is a competitor and is working closely with regulators to provide transparency and close the deal.
For the fourth quarter, the company expects total revenues of approximately $4.52 billion. It expects a net new ARR for digital media of approximately $550 million. It expects a non-GAAP EPS of about $3.50. ADBE also expects revenues for fiscal year 2023 to be between $19.10 billion and $19.30 billion, ahead of its projected 2022 revenue of $17.60 billion.
The stock has fallen 49.6% in price over the past year and 57.6% over the past year to close out its latest trading session at $285.75. Wall Street analysts expect the stock to hit $367.22 in the next 12 months, pointing to a potential increase of 28.5%.
Here’s what could impact ADBE’s performance in the coming months:
Robust financial data
ADBE’s total revenue increased 12.6% year-over-year to $4.43 billion for the third quarter ended September 2, 2022. The company’s net cash flow from operating activities increased 20.4% year-over-year to $ 1.70 billion. Non-GAAP operating income increased 7.9% year-over-year to $1.95 billion.
In addition, non-GAAP net income increased 6.6% year over year to $1.59 billion. Also, non-GAAP EPS came in at $3.40, up 9.3% year over year.
Estimates of revenue and earnings per share
Analysts expect ADBE’s earnings per share for fiscal 2022 and 2023 to rise 9.2% and 12.9% year-over-year to $13.62 and $15.38, respectively. In addition, revenue for fiscal 2022 and 2023 is expected to grow 11.6% and 10.7% year-over-year to $17.62 billion and $19.50 billion, respectively.
High profitability
In terms of the 12 month backlog gross profit margin87.76% of ADBE is 74.7% higher than the industry average of 50.22%. Likewise, the 12-month EBITDA margin of 39.14% is 222.8% higher than the industry average of 12.12%. In addition, the 35.45% 12-month running EBIT margin is 395.5% higher than the industry average of 7.15%.
POWR ratings show promise
ADBE has an overall rating of B, which is equivalent to a Buy in our POWR ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor being optimally weighted.
Our proprietary rating system also evaluates each stock based on eight different categories. ADBE has an A score for quality, consistent with its profitability exceeding that of the industry.
ADBE is number 30 out of 145 shares in the Software application industry. click here to access ADBE’s growth, value, momentum, stability and sentiment ratings.
Bottom Line
While the deal to acquire Figma is under antitrust scrutiny, ADBE is confident of closing the deal next year. Despite the high price paid for the Figma acquisition, the overall addressable market is strong, and the acquisition will help ADBE drive its long-term growth. In addition, the company’s fourth quarter and fiscal 2023 outlook remains strong.
Given the robust financial data, favorable analyst estimates and high profitability, it may be wise to invest in the stock to take advantage of its potential upside.
How does Adobe Inc. (ADBE) to its competitors?
ADBE has an overall POWR Rating of B, which is equivalent to a Buy rating. Check out these other stocks in the Software – Application industry with an A (Strong Buy) or B (Buy) rating: Commvault Systems, Inc. (CVLT), IBEX Limited (IBEX), and eGain Corporation (EGAN).
ADBE shares traded at $289.98 per share Monday morning, up $4.23 (+1.48%). Year-to-date, ADBE is down -48.86%, compared to a -19.81% rise in the benchmark S&P 500 index over the same period.
About the author: Dipanjan Banchur
Since he was in primary school, Dipanjan was interested in the stock market. This led to a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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