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Stock Strategist

Adobe Has Built a Wide Moat

Its products are the industry standard for creative professionals.

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Wide-moat  Adobe (ADBE) reported first-quarter results that were ahead of our expectations on the top and bottom lines. Management also offered a strong second-quarter outlook. The company is making good on its promises to cast a wider net with its Creative Cloud to attract new Adobe customers, while its Experience Cloud maintains its best-of-breed positioning in a competitive digital marketing environment. We continue to be impressed by Adobe’s margin expansion trajectory. After modestly lifting our medium-term operating margin assumptions to capture greater expected sales efficiency, we have raised our fair value estimate to $235 per share from $220.

First-quarter revenue rose 24% versus the prior-year period to $2.08 billion, modestly ahead of our expectations. Creative Cloud surpassed another key milestone as revenue grew 31% to $1.23 billion, and the company exited the quarter with more than $5 billion in Creative Cloud annualized recurring revenue for the first time. Management continues to tout the breadth of Creative Cloud’s portfolio as the key leverage that is enabling a broadening of the potential subscriber pool and says the company’s continued efforts in K-12 are paying off. The company is also succeeding in expanding its relationships with enterprises beyond traditional design users with products such as Stock and Spark.

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