Adobe Systems (ADBE) May Keep Soaring in 2018

Adobe Systems (ADBE, $172.54) is set to end a solid year on a high note, and analysts think the software juggernaut can continue to deliver in 2018, too.

The San Jose, Calif.-based company, whose stock has gained nearly 70% for the year-to-date, will release results for the fiscal quarter ended Nov. 30 after the market closes on Thursday. ADBE shareholders are expecting more of what they’ve become accustomed to: big gains on the top and bottom lines.

Adobe has always had little competition in its niche of creating software for designers and other creative types. Photoshop, for example, is so popular that it’s often used generically to refer to any program that can edit and manipulate graphics.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

But the company took a massive step a few years ago when it migrated its vast portfolio of offerings to the cloud – a move that still is paying off in spades.

Adobe Flourishes in the Cloud

Adobe’s Creative Suite – which includes the likes of the aforementioned Photoshop, Premiere Pro for video editing and Dreamweaver for website design, among others – has always been the company’s bedrock business. The revolution in cloud-based computing is making it so much more.

Like many other tech titans, Adobe has pivoted to charging monthly subscription fees for use of web-based software. Known as Creative Cloud, Adobe’s subscription model offers a steadier stream of revenue compared to the old way of doing business. It also helps the company lower costs.

The launch of the cloud-based subscription service in 2012 was met with skepticism and even anger among some users. Initial operational results weren’t great, either, with sales declining 8% to $4.1 billion in fiscal 2013.

But Adobe’s patience paid off. Sales have steadily climbed to $5.9 billion as of last year, and analysts covering ADBE stock believe the company will finish the current fiscal year with $7.3 billion in revenues.

Better still, Wall Street’s pros still are excited about the top-line and margin benefits from the ongoing shift to the cloud.

On Deck: Adobe’s Fourth-Quarter Earnings

UBS analysts, who rate ADBE a “Buy,” say investors are underestimating Adobe’s growth trajectory and efficient cost structure. In turn, that sets up the software company for a steady stream of better-than-expected quarters, which should propel Adobe’s stock even higher.

That’s saying something, considering Wall Street already projects year-over-year revenue growth of 24% in the current year and 20% for fiscal 2018.

But first, Adobe must get through Thursday’s report for the fiscal fourth quarter ended Nov. 30. According to data from Thomson Reuters, analysts expect the company to report revenues of $1.95 billion, up 21% from $1.61 billion a year ago. That should filter down to earnings of $1.16 per share, up from a year-ago profit of 90 cents. If Adobe clears that bar, it’ll have beaten earnings expectations in every report it has made in 2017.

No wonder Adobe’s stock has been so hot this year.

Adobe’s 70% year-to-date gains are several times better than the 18% improvement in the Standard & Poor’s 500-stock index – a barometer of U.S. equity performance. If stocks have been good in 2017, Adobe has been great.

True, when shares are flying as high as ADBE’s are, the slightest disappointment can spark a selloff. But even if UBS is wrong on Thursday and Adobe stumbles on earnings, the long-term outlook remains too compelling to ignore.

After all, the “buy” case for Adobe goes beyond customers taking up its cloud-based creative services.

“We remain optimistic about Adobe’s market position, compelling product lines, continued innovation, strong cash flow generation and solid balance sheet,” say analysts at Zacks Investment Research. “The company’s expansion in growing markets such as artificial intelligence and machine-learning framework is a big positive.”

ADBE shares might look pricey trading at 32 times expected earnings. However, consider them similar to stocks such as Facebook (FB) and Alphabet (GOOGL) in that they’re a downright bargain if the company can keep delivering as expected.

Analysts expect Adobe to record average annual earnings growth of 29% per year for the next half-decade. By that measure, Adobe is probably underpriced.

If Wall Street continues to underestimate what Adobe is accomplishing, don’t be surprised if ADBE stock continues to blow away the broader market in 2018.