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Adobe Stock: Market Reaction Nothing to Fret
Stock Analysis & Ideas

Adobe Stock: Market Reaction Nothing to Fret

Adobe (ADBE) is a diversified American multinational software company.

The stock drew down shortly after beating its earnings expectations for Q3, causing a sense of wariness among investors.

I’m, however, bullish on the stock. (See Analysts’ Top Stocks on TipRanks)

Earnings

Adobe reported third-quarter revenue of $3.9 billion (up 22% year-over-year) and EPS of $3.11 (a $0.09 beat).

The catalyst among the segments was Digital Media which reported $2.9 billion in revenue, a 23% year-over-year increase. In addition, Creative revenue also came in strong at $2.4 billion (+21% year-over-year), while Document Cloud recorded revenue of $493 million (+31% year-over-year).

Adobe also repurchased 1.7 million shares during the quarter that in turn saw its EPS rise by 5%.

Something critical to note is that Adobe reported its earnings during a period where technology stocks didn’t perform well due to the bond yield obsession after Jerome Powell’s speech stating that tapering could commence in 2022.

In the past week, various other tech stocks have reported earnings, and the peer group as a whole has performed well.

Company Outlook

Moving forward, Adobe is in a good place. Adobe continues to be a leader in the digital media space due to robust growth.

Furthermore, Acrobat remains one of Adobe’s most valuable products. It’s proven that the segment relies on GDP growth and enterprise spending, which is anticipated to rise in the following years due to the growing tech economy.

Adobe’s data mining services (Adobe marketing cloud) are proving to be invaluable in an industry with an illustrious expected CAGR of 14.8% through 2027..

We’re clearly looking at a well-diversified tech company with high-quality earnings on display, with 10-year average operating profit margins standing at 28.1%.

Key Metrics

Since March, Adobe has deleveraged its balance sheet by 46% while improving its interest coverage ratio by 18% in the same period. These data points combined indicate that liquidity has increased, and equity investors are being presented with excess value.

Adobe’s cash flow to CAPEX ratio has also increased by 52% since January 2020, meaning it’s generating 52% more cash flow per dollar invested in growth opportunities.

If Adobe can continue its sublime growth trajectory, there’s no doubt that shareholders will benefit as a consequence.

Wall Street’s Take

Wall Street analysts think Adobe is a Strong Buy, based on 18 Buys and three Holds assigned in the past three months.

The average Adobe price target of $720.16 implies 12.2% upside potential.

Concluding Thoughts

Adobe stock reacted badly after beating earnings, but this was due to a systemic reason more than anything else.

Adobe remains in a good place business wise, and key metrics indicate that further upside is ahead.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

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