Earnings Outlook: Adobe earnings: $100 billion valuation to get its first big test

Adobe Systems Inc.’s transition to the cloud has helped fuel the software company’s rise to a $100 billion company, but investors are hungry for more and will be looking for continued growth to justify the richer valuation.

Adobe ADBE, -0.53%  is scheduled to report fiscal first-quarter earnings after the close on Thursday, less than a month after cresting the $100 billion plateau for the first time. Since Adobe first announced its cloud-subscription model back in late 2013, shares have grown 370%, and analysts don’t expect the party to end now, pointing to 20% or more organic revenue growth from Adobe’s cloud model.

There is, however, a little imbalance between growth in Adobe’s product offerings. While the company’s Creative Cloud—software that includes programs like Photoshop, Acrobat and Dreamweaver—has thrived, its smaller experience design software business has struggled. While Adobe’s Creative Cloud products are expected to keep driving growth at the software company, some analysts expect capital freed up by the U.S. tax overhaul could loosen IT purse strings for Adobe’s digital marketing products.

Analysts, on average, expect creative products revenue of $1.21 billion, and experience cloud revenue of $555.8 million, according to FactSet data.

What to expect

Earnings: Of the 28 analysts surveyed by FactSet, Adobe on average is expected to post adjusted earnings of $1.43 a share, up from the $1.27 a share expected at the beginning of the quarter. Taking into account the recent U.S. tax overhaul, Adobe forecast $1.43 a share, up from a previous forecast of $1.27 a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of $1.46 a share.

Revenue: Wall Street expects revenue of $2.05 billion from Adobe, according to 25 analysts polled by FactSet. That’s up from the $2.04 billion forecast at the beginning of the quarter. Adobe predicts revenue of about $2.04 billion. Estimize expects revenue of $2.06 billion.

Stock movement: Adobe stock has gained after seven of its last 10 earnings reports, including a 3.8% gain after its first-quarter announcement at this time last year. Adobe shares have gained more than 25% since the company’s previous earnings report and for the year to date, while the S&P 500 index SPX, -0.64%  has gained 4.1% in 2018. The company’s market cap closed above $100 billion market cap for the first time on Feb. 23.

What analysts are saying: Jefferies analyst Brent Thill, who has a buy rating and a $235 price target on Adobe, said he expects a slight beat on revenue given that Adobe reiterated its revenue guidance in late January and raised its earnings forecast to account for the U.S. tax overhaul.

Thill expects the company’s Creative Cloud business to continue to be a strong performer, pointing to 31% growth in fiscal 2017, with strong growth from Japanese sales and attracting new users like former pirates with lower entry prices. The analyst also sees growing potential from educational users “seeding future generations of creative pros” and international expansion into China.

Stifel analyst Tom Roderick, who has a buy rating and a $230 price target, sees a little bit more room for growth even with management laying out “lofty goals of returning to peak margins” of about 40%. Roderick noted:

While 3Q17 was noted to be a challenge for Experience Cloud, our checks since have shown signs of stabilization, and we believe the purchasing environment as we enter 2018 is notably in Adobe’s favor. With customers clearly sitting on extra cash, we continue to hear that enterprise platform vendors stand to benefit the most. Adobe has established itself as just such a platform, on both the Creative Cloud and the Experience Cloud sides of the business.

Roderick also pointed out that Adobe has yet to increase its earnings guidance to account for the adoption of ASC 606, a new revenue recognition standard for contracted business.

Of the 31 analysts who cover Adobe, 23 have buy or overweight ratings and eight have hold ratings, with an average price target of $218.89, or 0.3% lower than Tuesday’s close.

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