Adobe Q4 Earnings: Is ADBE Expensive at 53.4x Price/EPS?

in EARNINGS/INVESTING IDEAS by

Adobe Inc. (FINBOX:ADBE) is scheduled to report Q4 earnings results on December 12, 2019, after markets close for trading.

Adobe’s software products for content creation are well respected in the industry and the company continues to dominate products for PDF file editing. Recently, the company has made significant efforts to shift its business model to subscription services that can generate recurring revenue streams and have fewer piracy concerns.

Some investors though are worried that the company’s high P/E ratio may not be justified citing decelerating growth in the company’s Creative Cloud business. The company has also built its growing digital experience business largely through acquisitions which raises some concerns about management’s ability to dominate the market.

The company is expected to report earnings of $2.25/share on revenue of $2.97 billion. The consensus earnings per share (EPS) of $2.25/share is based on a poll of 29 analysts and represents a growth of 23.0% over the same quarter last year when the company reported earnings of $1.83/share.

The revenue forecast of $2.97 billion based on a poll of 26 analysts implies a year-over-year (YoY) growth of 20.5%. Last year the company reported $2.465 billion in revenue for the quarter.

Expected to report EPS growth of $0.42/share for Q4, 2019
Metric Expected Prior Year YoY Change
Revenue $2,970.27 $2,464.63 20.5%
EPS $2.25 $1.83 23.0%

Earnings Call Trends

Historically, management has exceeded analyst expectations 7 out of the last 8 tracked quarters, and missed expectations 1 quarter. What are your expectations from Adobe for earnings this quarter? Let us know in the comments!

Analyst Expected vs Reported EPS
Quarter Expected Reported Surprise Result
Q3, 2019 $1.96 $2.05 4.9% Beat
Q2, 2019 $1.77 $1.83 3.4% Beat
Q1, 2019 $1.60 $1.71 6.9% Beat
Q4, 2018 $1.83 $1.83 -0.3% Missed
Q3, 2018 $1.68 $1.73 3.0% Beat
Q2, 2018 $1.54 $1.66 7.8% Beat
Q1, 2018 $1.43 $1.55 8.4% Beat
Q4, 2017 $1.15 $1.26 9.6% Beat

One question we always consider here at the Bankers’ Tribune is how important are earnings reports to Adobe’s stock price performance? It’s more important for some companies than for others.

In the following table, we summarize the company’s stock price movements after earnings releases. The “Price Day Prior” column shows the closing stock price on the day before the earnings report, and the “Price Next Day” column shows the stock price at the end of the trading day after the earnings report. After the last earnings report for the period ending August 30, 2019, the stock price reacted by falling by -1.1%.

Stock Price Performance After Earnings
Report Date Price Day Prior Price Next Day Change % Result
2019-09-17 $282.93 $279.72 -1.1% Decline
2019-06-18 $275.60 $291.21 5.7% Increase
2019-03-14 $264.38 $257.09 -2.8% Decline
2018-12-13 $245.55 $230 -6.3% Decline

Fundamentals And Technical Analysis

Adobe is currently trading at $303.74/share, down -0.1% for the day. The company is trading at 97.0% of its 52-week high of $313.11/share. The company’s stock price is up 8.6% since the last earnings report and up 0.2% over the previous week. The company’s 14 Day Relative Price Index (RSI) of 65.84 suggests the company is trading in technically neutral territory. The RSI is considered overbought when above 70 and oversold when below 30.

The current share price implies a price-to-earnings (P/E) multiple of 53.4x and a forward P/E multiple of 38.5x. Adobe’s current share price also implies a price-to-book (P/B) multiple of 14.5x. The following table summarizes some other key fundamental ratios:

Data as of December 11, 2019
Metric Value
Last Fiscal Period FY2019.Q3
Period End Date August 30, 2019
Stock Price (Current) $303.74
P/E Ratio 53.4x
P/E Ratio (Fwd) 38.5x
PEG Ratio 1.6
Total Debt to Capital (%) 2.7%
Levered Free Cash Flow $3.79 billion
Enterprise Value / EBITDA 41.7x

Source: Finbox

Company Profile: Adobe Inc.

Adobe Inc. is a large-cap stock with a market capitalization of $147 billion and a total enterprise value of $147.5 billion. The company operates in the Information Technology sector and Software industry.

Adobe Inc. operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. Its flagship product is Creative Cloud, a subscription service that allows the customer to download and access the latest versions of its creative products. This segment serves traditional content creators, Web application developers, and digital media professionals, as well as their management in marketing departments and agencies, companies, and publishers.

The company’s Digital Experience segment offers solutions for how digital advertising and marketing are created, managed, executed, measured, and optimized. This segment provides analytics, social marketing, targeting, media optimization, digital experience management, cross-channel campaign management, marketing automation, audience management, and video delivery and monetization solutions to digital marketers, advertisers, publishers, merchandisers, Web analysts, chief marketing officers, chief information officers, and chief revenue officers.

Its Publishing segment offers products and services, such as e-learning solutions, technical document publishing, Web application development, and high-end printing, as well as publishing needs of technical and business, and original equipment manufacturers (OEMs) printing businesses.

The company offers its products and services directly to enterprise customers through its sales force, as well as to end-users through app stores and through its Website at adobe.com. It also distributes products and services through a network of distributors, value-added resellers, systems integrators, software vendors and developers, retailers, and OEMs.

The company was formerly known as Adobe Systems Incorporated and changed its name to Adobe Inc. in October 2018. The company was founded in 1982 and is headquartered in San Jose, California.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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