Morgan Stanley Turns Bullish On Adobe, Highlights 'Durable' 20% EPS Growth

Software investors may want to consider passing on "hyper growth stories" in favor of a company like Adobe Inc ADBE, which offers a "durable" earnings per share growth profile, according to Morgan Stanley.

The Analyst

Keith Weiss upgraded Adobe from Equal-weight to Overweight with a price target lifted from $282 to $340.

The Thesis

Adobe's Digital Media business accounts for 70 percent of the company's total revenue, but the segment's outlook had minimal visibility, Weiss said in a Monday note. (See his track record here.)

Firsthand observations at the company's "Adobe Summit" event, chats with management and a financial analysis of the segment warrant a bullish stance, according to Morgan Stanley.

The Digital Media business could see a deceleration in growth at a faster pace than Street estimates are modeling, Weiss said. The company could benefit from "very natural leverage" across S&M and R&D operating expense categories, he said.

Adobe's Digital Experience could see an acceleration in organic growth and show a better-than-expected revenue growth rate, the analyst said. In addition, the business could show improving segment profits as M&A pressures ease and organic investments are yielding financial benefits, he said.

Adobe's outlook supports a case for 20-percent earnings per share compounded annual growth through fiscal 2021, and this isn't factored into the stock, according to Morgan Stanley.