Adobe (ADBE) has unfailingly positioned itself for the future of digital media and digital marketing, with the company essentially monopolizing the digital media industry with its Creative Cloud.
Adobe’s fundamental competitive advantage stems from leveraging the perks of its recurring SaaS revenue model, reaping the benefits attached to monthly subscriptions.
The company’s creative suite incorporates state-of-the-art tools in the industry, including Photoshop, Illustrator, and After Effects, which are widely regarded as must-haves for virtually any type of digital creator.
The company released its Q4 results earlier in December, posting an excellent end to a rather odd year, while the recent correction in the stock’s share price might signal a buying opportunity. I am bullish on the stock.
An Excellent Way to Wrap FY 2021
Adobe’s Q4 results closed the year on a high note for the company, with revenues once again growing impressively by 20% year-over-year to $4.11 billion.
This marked another record revenue milestone for the company. Non-GAAP diluted earnings per share increased 13.8% versus the prior-year period as well, reaching $3.20 with net income margins standing at jaw-dropping levels, near 30%. It’s rare to see such high net margins even from the most profitable companies in the world.
Adobe’s latest results solidified that the company’s growth can be well-sustained, as investors were concerned that Adobe’s growth would decelerate considerably following the one-off boost from COVID-19 last year. The company once again demonstrated that its comprehensive suite can draw new subscribers and generate more dollars from each subscriber powered by all the add-ons it provides to creators.
Specifically, the Digital Experience segment recorded revenues of $1.01 billion, a growth of 23% year-over-year. Of this amount, subscription revenues were at $886 million, representing 27% growth versus the comparable period last year.
The company’s outlook for FY 2022 included Digital Media’s annualized recurring revenue growth of around 17% on an adjusted basis and non-GAAP EPS of $13.70.
This implies a growth of around 9.77%, compared to EPS of $12.48 this past year. Considering that Adobe tends to hike its expectations through the year, it’s not likely that we will see double-digit EPS growth in the end. In its upcoming earnings, the company expects non-GAAP EPS of around $3.35.
Valuation
Shares of Adobe have corrected as of lately, along with most tech stocks. Based on management’s initial FY 2022 EPS (which is likely conservative) estimate, the stock is currently trading at a (forward) P/E of 37.7.
This is notably higher than its historical average of just over 30. That said, revenue growth is likely to remain robust, which should result in the stock growing into its valuation in the medium term.
Furthermore, I continue to regard Adobe as a high-quality company that deserves a place amongst all growth portfolios. Hence, I can see the stock retaining a small valuation premium.
Wall Street’s Take
Turning to Wall Street, Adobe has a Strong Buy consensus rating, based on 18 Buys and six Holds assigned in the past three months. At $674.67, the average Adobe price target implies 30.5% upside potential.
Conclusion
Due to the all-around qualities of Adobe’s suite, the company features a deep moat and solid growth prospects. The stock posted great year-end results recently, while its initial guidance for FY 2022 seems promising.
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