Adobe's Premium Valuation Is Warranted; Wunderlich Upgrades To Buy

Adobe Systems Incorporated ADBE reported another robust quarter, with Q1 2017 revenue and EPS well ahead of the consensus forecasts, along with stronger than anticipated guidance for Q2.

Wunderlich’s Ryan MacDonald upgraded the rating on the company from Hold to Buy, while raising the price target from $115 to $145.

The analyst mentioned that Adobe continued to execute well, and the stock deserves a premium valuation due to this and the company’s dominant market share and “unmatched combination of revenue growth and profitability.”

Q1 Beat

For Q1, the company reported revenue of $1.682 billion, representing 22 percent year-on-year growth, with EPS of $0.94. Both metrics beat the consensus expectations.

Digital Media also beat consensus, with revenue of $1.11 billion, driven by 29 percent year-on-year growth in Creative revenue.

Digital Marketing was also ahead of consensus at $501.1 million, while Marketing Cloud grew 26 percent year-on-year to $477 million.

Operating margins also beat expectations at 36.2 percent.

“Adobe repurchased 2.2mm shares, returning $238mm to shareholders; Adobe has $300mm remaining on its program and will then begin repurchasing under a new $2.5B program,” MacDonald stated.

Related Link: Adobe Surges After Record Beat

FY17 Guidance

Adobe Systems guided to Q2 revenue of $1.73 billion, ahead of consensus, with EPS at $0.94, also beating the consensus forecast.

Management expects net new Digital Media ARR (annual recurring revenue) of about $290 million, which is expected to contribute to 24 percent revenue growth for the Digital Media segment.

The company guided to 26 percent year on year growth for Marketing Cloud.

However, despite the Q1 beat and Q2 guidance, the FY2017 revenue and EPS guidance remained conservative at $7.090 billion and $3.75, respectively.