Adobe Analysts Mostly Bullish On Q3 Subscription Growth, Margin Expansion: 'The Great Digital Awakening'

Adobe Inc ADBE reported strong third-quarter results Tuesday. Here's what five analysts had to say after the print. 

The Adobe Analysts: BofA Securities analyst Kash Rangan reiterated a Buy rating on Adobe shares with a $570 price target. 

BMO Capital Markets analyst Keith Bachman maintained an Outperform rating and increased the price target from $535 to $560.

Morgan Stanley analyst Keith Weiss maintained an Overweight rating and $560 price target.

Wells Fargo Securities analyst Philip Winslow reiterated an Equal-weight rating and increased the price target from $375 to $500.

Piper Sandler analyst Brent Bracelin maintained an Overweight rating and increased the price target from $430 to $570.

BofA On Adobe's Digital Story: Adobe reported a strong quarter across the board, with revenues and pro forma earnings per share all beating consensus estimates, Rangan said in a note.

The EPS upside was due to a 280-basis-point operating margin expansion, thanks to T&E savings and direct engagement momentum, the analyst said.

BofA expects Adobe's Digital Experience margin improvement to drive 150-200 basis points of margin expansion in fiscal year 2021.

Adobe's annual recurring revenue — ARR — improvement and Digital Media growth of 20% in constant currency was due to Creative Cloud retention rates returning to pre-COVID-19 levels; record traffic to Adobe.com; and remote work benefits, he said. 

The fourth-quarter guidance implied deceleration amid continued macro risk and longer enterprise cycles, Rangan said.

"Adobe is an underappreciated ‘vaccine' and ‘vitamin' (Cloud Wars XII) and will continue to benefit from sustainable pull-forward and higher priority of digital transformation initiatives." 

See also: Option Trader Bets $6.1M Against Adobe Ahead Of Earnings

BMO Confident In Durability Of Adobe's Growth: Adobe's ARR exceeded expectations by much more than expected, Bachman said. ARR is a metric used by subscription businesses.

Margins and free cash flow also continued to impress, the analyst said.

The results and guidance for Experience Cloud were disappointing, he said. 

"Nevertheless, the net results increase our confidence in the durability of growth, particularly of Media Cloud." 

Morgan Stanley Names 4 Adobe Investor Questions: While lauding Adobe for strong net new ARR additions, Weiss said the investor debate is likely to center on four questions: durability of Digital Media growth, Digital Experience turning the corner, room for further margin improvement and the right multiple for the stock.

The fourth-quarter Digital Media guidance was well ahead of the  consensus and appears conservative, the analyst said. Adobe's management was bullish about opportunities to invest behind a big growth opportunity in Digital Media, he said. 

Digital Experience remains on track for improvement as the broader spending environment improves, Weiss said. 

Adobe is likely to see higher margins in fiscal years 2021 and 2022 as operating efficiency improves in the Digital Experience segment, the analyst said. 

Although Adobe's shares are trading well ahead of their five-year average P/E multiple relative to the broader market and software in particular, there is relative value in shares, according to Morgan Stanley. 

Wells Fargo Says Valuation Reflects Fundamentals: Adobe's transition to subscription and ability to increase its total addressable market is impressive, Winslow said.

Yet the stock's valuation reflects these trends, along with much of the Experience Cloud opportunity ahead, the analyst said. 

Piper Sandler's Key Takeaways On Adobe: Data-driven operating model benefits are on full display with Adobe's $114-million ARR beat, Bracelin said.

Document cloud growth prospects are materializing, with document cloud ARR increasing 35% year-over-year to $1.34 billion and representing the next major pillar of growth for the company, the analyst said.

Piper Sandler raised its estimates for Adobe, basing the expectations on Digital Media ARR topping $10 billion in the fourth quarter.

Adobe is capitalizing on the "great digital awakening," Bracelin said.

ADBE Price Action: At last check, Adobe shares were down 4.3% at $476.27 ahead of the close Wednesday. 

Related Link: COVID-19 An Incremental Growth Catalyst For Adobe, Analyst Says In Upgrade