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Value Investor
Wealth Building Opportunites for the Active Value Investor

June 15, 2020

This portfolio stock reported good second-quarter results and moves from Hold to Buy.

Today’s news:

• Adobe Systems (ADBE) reported good second-quarter results; moves from Hold to Buy.

Adobe Systems (ADBE, 400.00) reported second-quarter results on the afternoon of June 11 (November year end). Record revenue came in on target at $3.13 billion. Adjusted non-GAAP earnings per share (EPS) were $2.45, beating the $2.33 consensus estimate. Operating margins of 42.7% beat the analysts’ consensus estimate by over two percentage points (a.k.a. 200 basis points). Adobe repurchased $850 million of stock during the quarter, with $3.4 million remaining in the repurchase authorization.

Digital Media revenue grew 18% year-over-year, while annualized recurring revenue (ARR) grew more than expected, up 5.1% vs. the first quarter and 23% year-over-year. The quarter featured strong demand from the business segment’s Creative Cloud and Document Cloud.

Digital Experience’s subscription revenue grew 18% year-over-year, while the business segment’s total revenue grew 5% year-over-year, missing analysts’ estimates. Adobe is now deemphasizing its Advertising Cloud business within the Digital Experience business segment. Advertising Cloud contributes lower margins than do the other components of the Digital Experience business. Adobe also announced that given the macroeconomic environment, it significantly accelerated in Q2 its previously stated strategy of eliminating low-margin Advertising Cloud transaction-driven offerings. The company will continue to offer its Advertising Cloud software solutions. The macroeconomic environment and this strategic shift impacted Advertising Cloud targeted revenue in Q2 by approximately $50 million.

Management forecasts third-quarter revenue and EPS to be $3.15 billion and $2.40, respectively—each slightly lower than the consensus estimates of $3.26 billion and $2.46.

Fourteen investment firms have since raised their price targets on Adobe. Ten of those increases fell within a range of 410-450, up to 10% higher than the current share price. Two investment firms raised their targets to 375 and 400, below the current share price; and two investment firms raised their price targets much higher, to 460 and 470.

The stock exhibited a shakeout pattern on the price chart last week, when the rest of the market was falling. That’s a very bullish sign indicating near-term upside. I’m moving ADBE from Hold to a Buy recommendation based on the bullish price chart and strong earnings outlook, but I also urge caution due to recent weakness in the broader market. Buy.