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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.

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