Adobe Systems Inc. (ADBE, Financial) is a $47.27 billion market cap company that provides a line of software and services used by marketers, knowledge workers, application developers, enterprises and consumers. The company markets and licenses its software to enterprise customers through its sales force and to end users through app stores and its website.
The company reported stronger earnings in the last quarter, as earnings beat consensus estimates and reported results at the high end of its guidance range.
Analysts at Dougherty & Co. increased their price target to $122 from $116, while maintaining their "buy" rating. The stock price increased more than 23% in the past 12 months, and at the price of about $93, represents a 32% return. However, Yahoo! Finance estimated one-year target share price is $109, so the return from price appreciation would be 17.2%.
The company continues to change its business model. The move toward cloud and subscription services seems to be a consequence of the good performance and contributes toward the revenue showing the successful switch to the web-based subscription model. Moreover, the firm can make acquisitions to expand its solutions in the Digital Marketing segment.
The company reported earnings of $254 million or 51 cents per share on revenue of $1.383 billion during the first quarter. Those figures were higher than earnings of $85 million, or 17 cents per share, and revenue of $1.1 billion a year earlier. For the second quarter, the firm expects its revenue and EPS to be in the range of $1.37 billion and $1.42 billion and between 64 cents and 70 cents, respectively. For that quarter, the Street consensus sees the firm posting $1.39 billion and 65 cents in revenue and EPS. For the full year, the company expects fiscal 2016 revenue of $5.8 billion and $2.80 in EPS. Analysts’ expectations were $5.74 billion and $2.76 in revenue and EPS.
Finally, let's compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other companies in the same industry.
| Ticker | Company | ROE (%) |
| ADBE | Adobe | 11.71 |
| MSFT | Microsoft Corporation | 13.70 |
| AAPL | Apple Inc. | 42.94 |
| Ă‚ | Industry Median | 6.21 |
The company has a current ROE of 11.71%, which is higher than the sector peers. In general, analysts consider ROE ratios in the 15% to 20% range as representing attractive levels for investment. For investors looking at those levels or more, Microsoft (MSFT, Financial) or Apple (AAPL, Financial) could be good options. It is critical to understand this metric before investing, and it is important to look at the trend in ROE over time.
Regarding valuation, the stock sells at a trailing P/E of 60.2x, trading at a premium compared to a median of 24.4x for the industry. To use another metric, its price-to-book ratio of 6.65x indicates a premium versus the industry average of 2.75x, while the price-to-sales ratio of 9.43x is above the sector median of 2.26x. All these metrics indicate the stock is relatively overvalued.
The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $29,203, which represents a 23.9% compound annual growth rate.
As of the end of December 2015, Jeff Ubben’s ValueAct Capital is the largest shareholder of the company. The fund holds 14 million shares of the company valued at $1.32 billion. The position represented 9.11% of the equity portfolio and remained flat over the first quarter. On the other hand, Steve Mandel’s Lone Pine Capital has reduced the position by 36% to 4 million shares valued at $376.9 million; the position represents 1.61% of the fund’s portfolio.
On the bullish side, Ray Dalio (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), and Mairs and Power (Trades, Portfolio) have initiated new positions in the stock during the fourth quarter.
Final comment
As outlined in the article, the company reported upbeat results with earnings exceeding market's expectations. There are several key drivers of the market position, the move toward a modern model and active guru positions that make me feel bullish on the stock. For those reasons, I would recommend adding this stock to long term portfolios.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
