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Stock Analyst Update

Adobe: No Signs of Slowing Down

The Magento acquisition will bolster the firm's already strong standing in digital marketing while unlocking new opportunities.

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 Adobe (ADBE) reported second-quarter results that were slightly ahead of our expectations, as the firm continues to drive new user growth in its Digital Media business while Experience Cloud adoption remains healthy. Management indicated the firm has received regulatory clearance on its pending Magento acquisition, a deal that should close next week. We continue to believe this acquisition will bolster the firm’s already-strong standing in digital marketing while unlocking new opportunities in both business-to-business and business-to-consumer commerce. We are maintaining our wide moat rating and $235 fair value estimate, and shares appear fairly valued following these results.

Second-quarter revenue grew 24% versus the prior-year period to $2.2 billion, roughly 2% ahead of our internal estimate. Subscription revenue growth remains robust, rising 30% year over year and approaching an $8 billion annualized run rate. Digital Media remains the firm’s key growth driver, rising 28% year over year. Management noted the firm has seen very little price elasticity following the Creative Cloud price hikes that were rolled out in the quarter, while international market adoption remains healthy. The Document Cloud business continues to pick up steam as the subscription revenue base increases, with revenue rising 22% versus the prior-year period to $243 million. We were also heartened to see an acceleration in Experience Cloud subscription revenue, which rose roughly 25% in the quarter to $469 million.

Management’s guidance continues to move in the direction of our prior estimates, including the firm’s updated non-GAAP tax rate guidance of 14%, down from the firm’s previously announced guidance of 18%, which we had suspected was high given Adobe’s mix of international earnings. We continue to model a long-term non-GAAP tax rate of 13%, as we expect international growth opportunities to lower the firm’s tax basis even further.

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

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