Adobe (ADBE) is a well-known brand name that offers its products as a bundle on Adobe Creative Cloud.
The company recently came out with its Q3 earnings results, which showed continued strong growth in both the top and bottom lines. Revenues increased 22% year-over-year, while non-GAAP profits per share increased by 21%.
Despite these robust results, the stock has taken a hit of over 11% since earnings were released on September 21.
Though no concrete reasons can be held responsible for the downfall in the share price, investors definitely were expecting a more prominent beat, especially on the top line.
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Is the Recent Slide a cause for Concern?
To be honest, this drop should not be cause for alarm, at least not for long-term investors.
Adobe has plenty to offer on its platter, and it may easily outperform expectations in the coming quarters. Its creative applications, like Photoshop and Illustrator, as well as document cloud services, such as PDF and electronic signature software, are gaining traction. To be more precise, growing digitalization and the work-from-home environment have assisted in the acceleration of the transition from paper to digital documents. The trend is likely to continue, benefiting this creative software firm.
Furthermore, Adobe has a solid business model with a proven track record of success. The business is profitable, with sales coming in the double digits in recent quarters, and the firm expects this trend to continue.
Even for the upcoming fourth quarter, Adobe predicts a double-digit rise in revenues of 19% on a year-over-year basis.
Adobe’s strong balance sheet is another positive that should not be disregarded. The company had a cash balance of $6.2 billion (including short-term investments) at the end of Q3, with a debt of just $4.12 billion, indicating that it has enough cash for future investments.
Not to mention that the digital transformation movement is only getting started; thus the stock has a slew of upside potential in future days. Despite the recent drop, the stock is still up approximately 16% over the past year and 18% on a year-to-date basis.
Wall Street’s Take
Overall, Wall Street analysts are pretty well unified in their views on Adobe. The stock has a Strong Buy consensus rating, based on 17 Buys and 3 Holds assigned in the past three months.
As for the price target, the average ADBE price target of $721.83 implies 26.6% upside potential to current levels.
Disclosure: On the date of publication, Shalu Saraf had no position in any of the companies discussed in this article.
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