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Stock Analyst Update

Picture-Perfect Quarter for Adobe; FVE Up to $569

Wide-moat Adobe reported strong second-quarter results, including upside to guidance for revenue and non-GAAP EPS, and provided a better-than-expected third-quarter outlook.

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Wide-moat Adobe (ADBE) reported strong second-quarter results, including upside to guidance for revenue and non-GAAP EPS, and provided a better-than-expected third-quarter outlook. Management did not raise full-year guidance but was enthusiastic about exceeding its previously issued 2021 outlook. We see strength in all segments and all geographies regarding quarterly results and are pleased to see continued strength in the digital experience, or DX, segment. SMB performance is back to prepandemic levels in the U.S. and improving globally as well. We think results continue to support our investment case that Adobe will continue to dominate the creative segment, and its well-rounded portfolio, including Magento and Marketo, positions the firm as a digital marketing leader. Given results and guidance, we are raising our fair value estimate to $569 per share from $520. Given the stock’s run year to date, we see shares as fairly valued.

Second-quarter revenue grew 23% year over year to $3.835 billion, compared with guidance of $3.720 billion and FactSet consensus of $3.721 billion. Digital media revenue grew 25% year over year while DX revenue grew 21% year over year, with both being nicely ahead of our own expectations. Workfront deals helped lift deal sizes, including the largest deal ever in the DX segment during the quarter. We remain impressed by Adobe’s ability to drive new users in digital media and we are relieved to see the DX resurgence, and we see no reason why these trends will not continue through 2022. Publishing and advertising revenue declined 10% year over year, which was a little better than our forecast. Net new digital ARR was $518 million, versus guidance of $450 million. Document cloud (within digital media) remained strong in the quarter with continued momentum for Adobe Sign, which saw 40% year-over-year ARR growth. Non-GAAP operating margin was 45.9% compared with 42.7% a year ago and nicely ahead of our own expectations.

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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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