Wide-moat Adobe (ADBE) reported strong third-quarter results, including upside to consensus for both revenue and EPS, and provided quarterly guidance that was generally in line with Street expectations. Given that the company pulled its annual guidance last quarter and the strength in revenue this quarter, we think revenue guidance for the fourth quarter that is less than half a percent below CapIQ consensus is simply due to conservatism by management, which is not at all surprising given coronavirus-driven macro uncertainty. New customer engagement levels remained robust and activity on adobe.com remains elevated as a result of the extended remote work environment. We think results support our investment case that Adobe will continue to dominate the creative segment, and its well-rounded portfolio, including Magento and Marketo, position the firm as a digital marketing leader. Given results, we have included slightly higher growth throughout our forecast and are therefore raising our fair value estimate to $400 per share, from $350. While we believe Adobe offers an exceptional franchise, we struggle with valuation as shares are already trading over $500.
Third-quarter revenue grew 14% year over year to $3.225 billion, compared with CapIQ consensus of $3.160 billion. Digital media was well ahead of our model and drove most of the upside, although digital experience was actually ahead of our model as well for the first time in several quarters. Digital experience showed signs of life, growing 14% year over year after normalizing for the discontinuation of the advertising cloud transactional business, and saw particular strength in large deals. Net new digital ARR was again excellent at $458 million, versus guidance of $340 million. Document cloud (within digital media) was strong in the quarter across a variety of metrics, once again including Adobe Sign, which saw enterprise bookings growth of more than 200% year over year. Not surprisingly, Magento was strong again.
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