Adobe Inc. (ADBE - Get Rating) functions as a diversified software company internationally. It operates through three segments: Digital Media, Digital Experience, and Publishing and Advertising. The stock has gained 1.1% over the past month to close its last trading session at $391.96.

“Adobe achieved record Q2 revenue with strong demand across Creative Cloud, Document Cloud, and Experience Cloud,” said Shantanu Narayen, chairman, and CEO. He also said, “We delivered another quarter of strong financial results, with greater than $2 billion in operating cash flows demonstrating the strength of Adobe’s growing revenue streams and financial discipline.”

Given ADBE’s solid financials, our proprietary POWR Ratings system upgraded the stock from Neutral to Buy.

Here is what could shape ADBE’s performance in the near term:

Latest Developments

Last month, ADBE announced innovations for its customer data platform (CDP), Adobe Real-Time CDP, to help brands transition from third-party cookies to first-party data. As businesses across all industries adopt Adobe Real-Time CDP, ADBE is introducing enriched customer profiles with commerce, AI-powered targeting, new privacy and security tools, and Segment Match across channels.

Also, last month ADBE expanded its partnership with The Home Depot to improve the customer experience. As part of the company’s interconnected retail strategy, a smooth experience extends across e-commerce, an award-winning mobile app, and in-store services such as pickup lockers and an in-app product locator. With so many touchpoints, the ADBE partnership will provide comprehensive insights into the customer journey.

Robust Financials

ADBE’s total revenue increased 14.4% year-over-year to $4.39 billion for the second quarter ended June 3, 2022. Its non-GAAP operating income grew 12% from its year-ago value to $1.97 billion, while its non-GAAP net income amounted to $1.59 billion, up 8.9% from the prior-year quarter. The company’s non-GAAP EPS rose 10.6% year-over-year to $3.35.

Strong Profitability

ADBE’s trailing-12-month net income margin of 29.29% is 534.3% higher than the industry average of 4.62%. In addition, its trailing-12-month gross profit margin of 87.87% is 50.7% higher than the 73.40% industry average. Also, its trailing-12-month ROE, ROC, and ROA are 416.3%, 389.2%, and 536.9% higher than the respective industry averages.

Impressive Growth Prospects

Street expects ADBE’s revenues to rise 11.9% in the current year and 13.9% next year. The company’s EPS is expected to rise 7.1% in the current quarter, 8.3% in the current year, and 17.2% next year.

In addition, ADBE’s EPS is expected to rise at a 14.2% CAGR over the next five years. Furthermore, the company has an impressive earnings surprise history; it topped the consensus EPS estimates in each of the trailing four quarters.

Consensus Rating and Price Target Indicate Potential Upside

Out of the 21 Wall Street analysts that rated ADBE, 17 rated it Buy, and four rated it hold. The 12-month median price target of $458.67 indicates a 17% potential upside. The price targets range from a low of $362.00 to a high of $550.00.

POWR Ratings Reflect Solid Prospects

ADBE has an overall B grade, which equates to a Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade for Quality and a B for Sentiment. ADBE’s higher-than-industry profitability is consistent with its Quality grade. In addition, the year-over-year growth indicated by the consensus earnings estimates justifies its Sentiment grade.

Among the 154 stocks in the F-rated Software – Application industry, ADBE is ranked #31.

Beyond what I stated above, we have graded ADBE for Growth, Value, Stability, and Momentum. Get all ADBE ratings here.

Bottom Line

ADBE’s robust financial performance, impressive revenue growth across all segments, and various service and product innovations should drive the stock’s performance. Therefore, we think it could be wise to add the stock to your watchlist.

How does Adobe Inc. (ADBE) Stack Up Against its Peers?

ADBE has an overall POWR Rating of B, which equates to a Buy. Check out these other stocks within the Software – Application industry with A (Strong Buy) ratings: Rimini Street Inc. (RMNI - Get Rating), American Software, Inc. (AMSWA - Get Rating), and IBEX Ltd. (IBEX - Get Rating).

ADBE shares were trading at $379.73 per share on Tuesday afternoon, down $12.23 (-3.12%). Year-to-date, ADBE has declined -33.04%, versus a -17.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Spandan Khandelwal

Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing. More...

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