Why are analysts so bullish on Adobe?

• Adobe Inc (NASDAQ: ADBE) share price climbed over 7% in the last one week
• The software company posted better-than-expected results for the second quarter of fiscal 2021
• Almost all analysts rating the stock lifted their price targets following the earnings report
• Adobe forecasted that Q3 2021’s revenue is on track to beating Q3 2020’s sales by 21%
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Adobe stock price: what’s the latest?

Adobe shares have rallied as much as 7.3% since releasing its financial results for the second quarter of fiscal 2021.

The counter closed at US$574.23 a share on Wednesday (23 June 2021).

The software company posted a quarterly revenue of US$3.84 billion in its second quarter of fiscal year 2021, which is a gain of 23% year-over-year.

This was higher than analysts’ consensus sales estimates of US$3.7 billion for the quarter.

Diluted earnings per share came in at US$3.03 on a non-GAAP basis, also beating analyst predictions of US$2.81 by 7.7%.

Breaking down by segment, Digital Media revenue was US$2.79 billion, which represents a 25% year-over-year growth. Creative revenue grew to US$2.32 billion, up 24% from a year ago, while Document Cloud revenue hit US$469 million, a 30% year-on-year growth.

How do analysts view the stock?

Following the better-than-expected earnings, many analysts raised their price targets on the stock.

Most bullish of the lot was Goldman Sachs analyst Kash Rangan, who lifted his price target to US$665 from US$580, alongside a ‘buy’ call.

Adobe shares are ‘poised to break out into new highs’ following an upbeat second quarter, Rangan wrote in a research note.

He also noted that the ‘key driver’ in this quarter was net new annual recurring revenue, which came in at US$518 million against an industry expectation of US$450 million. Rangan added that this implied that the pandemic was not the cause of recent quarters’ higher demand.

Similarly optimistic was JPMorgan analyst Sterling Auty, who raised his firm’s price estimate on Adobe to US$660 from US$595 while maintaining an ‘overweight’ rating.

Auty wrote that while all segments performed well in the second quarter, it was the continued strong performance of the Creative Cloud segment that ‘keeps surprising at unexpected levels given its scale’.

Morgan Stanley’s Keith Weiss, who boosted his price target on the stock to US$610 from US$575, wrote that he sees ‘the longer-term growth story for ADBE as better than most’ because of its dominant market share in ‘some of the most dynamic secular growth areas in software’.

These areas include creative design, dynamic media, and marketing automation, Weiss said.

Analyst sentiments published by MarketBeat show a consensus rating of ‘buy’ and share price target of US$604.84, which represents a 5.33% upside from Adobe’s last traded price.

What is Adobe’s outlook for the upcoming quarter?

Looking ahead, Adobe forecasted that total revenue in the third quarter will come up to roughly US$3.88 billion, which would exceed Q3 2020’s reported sales of US$3.2 billion by 21.3%.

This is factoring in ‘current macroeconomic conditions and expected return of summer seasonality associated with the months of June, July and August’.

Elsewhere, it expects Q3’s digital media segment revenue to increase 22% year-on-year, with digital media annualised recurring revenue hitting roughly US$440 million.

Q3’s digital experience segment revenue and digital experience subscription revenue are expected to grow 21% and 25% year-on-year respectively.

Finally, GAAP and non-GAAP earnings per share of US$2.27 and US$3 are also targeted in the upcoming quarter.

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