Adobe (ADBE), worldwide leader in digital media & marketing solutions, is delivering 40% profit growth as it continues to thrive with its subscription model. Years ago, Adobe customers used to purchase Adobe products in boxes at a computer store. Thus, company profit growth was erratic year-to-year. Now the company has molded its business into a steady subscription model, and is delivering not only steady sales and profit growth but rapid growth as well. Digital video will be the #1 thing people do with their spare time, and Adobe’s software is used by the movie makers and digital marketers to make and market images and videos. Adobe has two main divisions: 

  • Digital Media is the largest division at 68% of sales and includes Adobe Creative Cloud which delivers cloud-based services for creating digital media, as well as Adobe Document Cloud, which provides a modern way to manage paper-to-digital document storage. Last November Adobe launched Adobe Creative Cloud for teams in China, one of the world’s largest digital economies.
  • Digital Marketing is the 2nd division with 28% of sales and includes Adobe’s Marketing Cloud, which is the best-in-class solution for digital marketers that allows them to analyze data, build campaigns, and manage content. Adobe measures 80% of all online transactions from the top 100 US retailers, and $7.50 out of every $10 spent online with the top 500 US retailers go through Adobe Marketing Cloud.

ADBE’s qtrly profits have climbed from $0.28 to 0.36, 0.44, 0.48, 0.54, 0.62, 0.66, 0.71, 0.75, 0.90 and $0.94 the last eleven qtrs. Management predicts 2015-2018 sales and profit growth of +20% and +30% respectively. Last qtr analysts had an Estimated Long-Term Growth Rate of 31% on the stock, and oddly that dropped to 16% this qtr. I believe the company is growing around 30% to 40% per year and the stock is a value at 33x earnings. Adobe is one of my favorite stocks because of its strong profit growth and high certainty due to recurring revenue. Management also buys back stock. This is one of the best stories in the stock market, yet the stock isn’t getting the respect it deserves. 

Sharek’s Take
David SharekLast qtr ADBE delivered 22% revenue growth for the 2nd straight qtr as profits jumped 42%, which blew past the 32% estimate. Afterwards, analysts increased profit estimates across the board. 2017 estimates have now grown from $3.81 to $3.95 the past 4 qtrs. Profit Estimates for the next 4 qtrs look great with 34%, 29%, 21% and 22% expected. I envision the company delivering at least 35% profit growth in the coming year. 
One Year Chart
Last qtr ADBE delivered 22% revenue growth for the 2nd straight qtr as profits jumped 42%, which blew past the 32% estimate. Afterwards, analysts increased profit estimates across the board. 2017 estimates have now grown from $3.81 to $3.95 the past 4 qtrs. Profit Estimates for the next 4 qtrs look great with 34%, 29%, 21% and 22% expected. I envision the company delivering at least 35% profit growth in the coming year. 
Fair Value
My Fair Value P/E is 40x earnings which is $158 per share this year and $199 next year. I do wish to point out this company made a transition from transactional sales to subscription sales and thus profit growth should now grow at a more consistent pace than it had during the last decade.
Bottom Line
Here you can see the effect of the move to subscription sales. For the past five years Adobe stock has been on a steady move higher. With these impressive results I expect the stock to continue on its current trend. Adobe Systems is one of my favorite stocks because it’s delivering impressive profit growth with a high degree of certainty. ADBE ranks 6th in the Growth Portfolio and Aggressive Growth Portfolio Power Rankings.
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Smaller investors or people who like to be in just hot stocks might fit with the Aggressive Growth Portfolio, which consists of the top stocks in the Growth Portfolio Power Rankings. Power Rankings are David Sharek’s top ranked stocks based on timeliness and upside.

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