Wall Street Reacts After Adobe Posts Q2 Earnings Beat

Adobe Systems Incorporated ADBE's fiscal second-quarter print came in better than expected Thursday afternoon. Here's how the sell side reacted.

The Analysts

• Pivotal Research Group's Brian Wieser maintained Adobe at Hold with a price target lifted from $199 to $235.
• Bernstein's Mark Moerdler maintained Adobe at Outperform and lifted the price target from $261 to $292.
• BMO Capital Markets' Keith Bachman maintained Adobe at Outperform with a price target lifted from $260 to $278.
• JMP Securities' Patrick Walravens maintained Adobe at Market Perform with no assigned price target.
• JPMorgan's Sterling Auty maintained Adobe at Neutral with a price target lifted from $235 to $260.
• Morgan Stanley's Keith Weiss maintains at Equal-Weight, price target lifted from $235 to $250.
• Canaccord Genuity's Richard Davis maintains at Buy, price target lifted from $245 to $280.

Pivotal: Another Solid Quarter

Adobe reported "another solid quarter" that was highlighted by multiple encouraging metrics, Wieser said in a research report. They include:

• Twenty-four-percent revenue growth versus expectations of 21 percent.
• Non-GAAP operating margin of 40 percent, "well ahead" of last year's 37-percent figure. 
• EPS was "up significantly" from $1.02 a year ago to $1.66.
• Deferred revenue growth of 27 percent marks the fastest pace in six quarters.

Adobe guided for revenue to grow 22 percent in the fiscal third quarter, which fell short of Wieser's expectations. The stock's true value is below its current trading price, Wieser said, although he said it's likely a result of the costs of capital assumed in a discounted cash flow model used to value stocks that Pivotal covers. 

Bernstein Bullish On Opportunity

Adobe's stock moved lower after its earnings report, likely due to a slight underperofrmance in margins, Moerdler said in a research report. But the shortfall shouldn't concern investors, as Adobe lifted its full-year guidance "again without explicitly doing so" and guided its fiscal third quarter ahead of consensus.

Investors should continue holding a bullish stance on Adobe's stock based on its large opportunity ahead, including Adobe Experience Cloud's ability to gain share in a $53-billion total addressable market, the analyst said. Bernstein projects continued 20-percent operating margin expansion at Adobe and a declining share count that leads to 20-percent EPS and free cash flow growth. 

BMO: 'Right Balance'

Adobe's operating margin expanded in the quarter, which is an "enviable performance," Bachman said. Margin expansion slowed compared to prior quarters, the analyst said. Adobe should be able to find the "right balance" between managing investments to generate sustainable revenue growth and margin expansion, according to BMO. 

JMP: Valuation Concerns Remain

Adobe's earnings report solidified the company's "good momentum," but the stock is fairly valued, Walravens said in a research report. Adobe shares are trading at 11.7x CY19E EV/revenue, 27.4x EV/FCF and 33.7x P/E. The peer group average of large-cap software companies are trading at valuations of 4.8x, 15.2x, and 18.3x, respectively, according to JMP. 

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JPMorgan: 'Not As Clean' As Expected

Adobe's earnings report was not the "prototypical quarter" investors have become accustomed to, Auty said in a research report. Most notably, annualized recurring revenue was "only inline" with expectations, while the EPS beat is due to below-the-line items, the analyst said.

Morgan Stanley: What To Watch

Adobe's Q2 print fell short of "great expectations" but was nevertheless "good," Weiss said in a research report. Looking forward, investors should monitor the following, the analyst said:

• Adobe's fiscal Q3 guidance implies a "tick down" in net new ARR to $310 million.
• Operating margins are moving down despite 60-percent year-over-year EPS growth.
• Adobe's earnings beat was partially driven by a lower-than-expected tax rate of 5 percent versus guidance of 11 percent.

Canaccord Genuity: 'Exemplary' Quarter, Company

Adobe's stock decline after an "exemplary quarter" shouldn't come as a surprise after a nearly 50-percent return since the start of 2018, Davis said in a research report. Some "model maniacs" likely had issue with management's "conservative" guidance for the upcoming quarter, but few companies offer aggressive guidance coming into a seasonally slow quarter, the analyst said. 

Adobe is an "exemplary company," Davis said, adding that the stock is trading at the "high end of attractive" at 29x 2019 EV/FCF.

Price Action

Adobe shares were down 2.16 percent at $252.52 at the time of publication Friday morning. 

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