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Adobe’s Subscription Revenue Continues to Shine

July 22, 2018 / By /
Stock (Symbol)

Adobe Systems (ADBE)
Stock Price

$148
Sector
Technology
Data is as of
July 18, 2017
Expected to Report
Sept 19
Company Description
adobe_red_logoAdobe Systems offers products and services for professionals, marketers, application developers, enterprises and consumers for creating, managing, delivering, optimizing and engaging with content. The Company’s operates in three segments: Digital Marketing, Digital Media, and Print and Publishing. Source: Thomson Financial
Sharek’s Take
David SharekAdobe (ADBE) continues to shine with its subscription model.  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. Subscription revenue is 84% of Adobe sales, up from 78% in the year-ago period. 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 the following 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 Media sales rose 27% last qtr.
  • Digital Marketing is the 2nd division with 29% 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. Digital Marketing sales rose 25% last qtr.
  • Print and Publishing only accounts for 3% of sales, and helps magazine, newspaper and book publishers design layouts, graphics and illustrations. This division didn’t grow last qtr.

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, $0.94 and $1.02 the last twelve qtrs. Management predicts 2015-2018 sales and profit growth of +20% and +30% respectively, but profits have been/are growing around 45%. The analyst Estimated Long-Term Growth Rate is a robust 31%. Although this stock is up from $100 to $150 the past year, it still has a P/E of just 35. My Fair Value is a P/E of 40 which is $162 this year and $204 next year. ADBE is clearly one of the top growth stocks in the market.
One Year Chart
Last qtr ADBE delivered 27% sales growth as profits jumped 44%, which blew past the 34% estimate. After the company reported, future estimates increased across the board. Qtrly profit Estimates for the next 4 qtrs are 35%, 22%, 24% and 21%. Adobe has been upping and beating estimates so much it might continue its 40% profit growth for the foreseeable future.
Fair Value
My Fair Value is 40x earnings, but with subscription revenue almost 90% of sales, I could put the Fair Value at 45x earnings. Plus, with ADBE upping estimates, it will probably earn more than $4 a share this year.
Bottom Line
Adobe Systems has transformed itself from an “in the box” software company to one with a steady stream of subscription revenue. Also, the company is on the cutting edge of development software for the digital world. Adobe Systems is one of my favorite stocks. ADBE ranks 6th in the Growth Portfolio and Aggressive Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

6 of 33

Aggressive Growth Portfolio

6 of 13

Conservative Stock Portfolio

N/A

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