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Adobe Remains A Top Large-Cap Pick With Analysts

October 19, 2017 1:25 pm
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Adobe Systems Incorporated (NASDAQ:ADBE) managed to wow the Street with its solid fiscal-year 2018 guidance issued at the financial analyst briefing held at the sidelines of its Adobe MAX user conference. Sell-side firms were equally impressed and were quick enough to name Adobe as their top pick.

The company guided 2018 revenue growth to 20 percent year over year to $8.7 billion, and operating margin to 40 percent, piggybacking on 23 percent growth in the higher margin digital media. The company reaffirmed its fourth-quarter guidance.

At the event, the company released five new features and many new enhancements to existing products.

As such, Bank of America Merrill Lynch reiterated its Buy rating on the shares of Adobe and lifted its price target from $184 to $213. The firm said Adobe is its large-cap growth pick along with salesforce.com, inc. (NYSE:CRM).

Meanwhile, Wells Fargo Securities maintains its Market Perform rating on Adobe, with a $145 price target, as it believes the stock’s current valuation reflects the company’s transition to subscription and growth in marketing application.

At the time of writing, Adobe shares were soaring 11.35 percent to a record high of $170.36.

Multiple Growth Vectors Ahead

BofA Merrill Lynch analysts Kash Rangan and Shankar Subramanian said following their attendance of the event, they see multiple growth vectors ahead of the stock. The analysts said digital media will contribute $12 billion to the $22 billion revenues estimated for 2022, with marketing accounting for about $5 billion.

“We think ADBE digital media business is near an inflection point in subscriber adoption driven by democratization of creative and acrobat across enterprises, just as Microsoft Corporation (NASDAQ:MSFT) benefitted from strong O365 adoption,” the analysts added.

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Despite the doubling of digital media revenues between now and 2022, the analysts said it would have penetrated into only 40 percent of the overall total addressable market. The analysts expect digital marketing to have penetrated into only 10 percent of the TAM.

BofA Merrill Lynch based its 20 percent growth expectation on:

  • New products XD, Adobe Spark and Lightroom CC having strong customer traction now.
  • Average revenue per user tailwind.
  • Plenty of cross-selling and upselling opportunities across digital media, document and marketing.
  • Cumulative users supporting market expansion.

As such, the firm raised its 2018 and 2019 estimates by 13 cents and 12 cents, respectively to $5.52 and $6.84, respectively.

Wells Fargo’s Key Takeaways

Adobe estimates the TAM for its Creative Cloud business to be $24.2 billion in 2020, with $11.4 billion from core Creative Cloud sales, $5.7 billion from market-expansive sales and $7.1 billion from value expansive offering.

From the numbers, Wells Fargo said the company continues to expect conversion of its core customers to its Creative Cloud offering, as well as an increased uptake of newer products.

The company expects TAM for its Adobe Experience Cloud, its marketing cloud, to be $53.1 billion in 2020, up from $40 billion in 2019. The company also said its average annualized recurring revenue, or ARR, from its top 100 customers was at $4.9 million and that 70 percent of its top 500 customers have three or more of the company’s marketing solutions.

Related Link: Bernstein’s Favorites In The US SMID-Cap Software Space
Image Credit: By Ben P L (Adobe in Utah) [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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