Tech giant Adobe Inc. (NASDAQ: ADBE) will be announcing its quarterly results next week on June 17, according to its earnings calendar. It will be the company’s second quarter of fiscal 2021 results that ended in May. Adobe is part of the S&ampP 500 Index and has been one of the top performers here.

In the last 10-years, shares of ADBE stock have surged 1,450%. It means an investment of $1,000 in Adobe stock in June 2011 would have ballooned to around $15,000 today. In this period the S&ampP 500 has surged 300%.

However, in 2021, ADBE stock has underperformed the S&ampP 500. While the index has gained 13.4% year to date, Adobe shares have gained less than 1%. The next key driver of Adobe’s shares will be its upcoming results and let’s see what Wall Street expects from the company.

 

Adobe forecast to grow sales by 17.9% in Q2

In the second quarter of fiscal 2021, Adobe is forecast to grow its sales by 17.9% year over year to $3.73 billion, up from $3.16 billion in Q2 of 2020. Comparatively, its adjusted earnings per share are expected to rise by 14.7% from $2.45 per share to $2.81 per share in this period.

For fiscal 2021, Wall Street expects Adobe to increase sales by 20% to $15.47 billion from $12.87 billion. Its adjusted EPS is forecast to grow by 17.4% to $11.86 in 2021.

In case, Adobe surpasses consensus estimates in Q2 and provides better-than-expected guidance for fiscal 2021, investors can expect its stock to gain pace and move higher. Investors should also note that the company has beaten consensus earnings estimates in each of the last eight quarters.

Adobe operates as a diversified software company. Its Digital Media segment provides tools and solutions that enable users to create, publish and monetize their digital content. Its flagship product is Creative Cloud which is a subscription service that allows users to download and access the latest suite of products.

Its Digital Experience segment offers products and solutions for creating, managing, and monetizing customer experiences from analytics to commerce. Adobe also has a Publishing and Advertisement business that offers e-learning solutions, technical document publishing, web application development, and other solutions.

 

Adobe gaining market share

Adobe has established itself as one of the leaders in the creativity software market. This vertical is rapidly expanding and according to Adobe’s management, its total addressable market might increase from $83 billion in 2020 to $147 billion in 2023, increasing at an annual rate of 23% year over year.

One of the key drivers of this growth is the growing enterprise adoption of digital solutions. One report from market research company IDC Corp. estimates digital transformation spending to touch $6.8 trillion between 2020 and 2023, giving Adobe enough room to grow top-line in the future.

Historically, Adobe has managed to increase its revenue at a faster rate compared to its total market opportunity. It has successfully gained market share in multiple verticals and is poised to replicate its performance going forward as well.

Another interesting aspect that investors should note is that Adobe’s free cash flow is growing at a faster pace compared to its revenue, which is an indicator of rising profit margins. This trend can be attributed to rising recurring sales.

In fiscal 2015, around 67% of total Adobe sales were from subscription sales and this number surged to 90% in fiscal 2020. It allowed the company to improve its gross margin to 87% from 84% while operating margin rose from 19% to 33% in this period.

Further, Adobe has successfully managed to increase enterprise spending over the years. Approximately 61% of its top 100 customers used three or more ADBE products back in 2015. Now, 93% of its customers use more than three products on its platform lowering acquisition costs.

 

Will ADBE stock beat the S&ampP 500?

We can see that ADBE stock is trading at a forward price to sales multiple of 15.6x and a price to sales multiple of 43x which is extremely steep. However, growth stocks command a premium valuation. While Adobe may be vulnerable in a broader market sell-off, every correction should be viewed as a buying opportunity given the company’s stellar growth estimates and multiple secular tailwinds.

Analysts covering ADBE stock have a 12-month average price target of $571 which is 12.4% above its current trading price.

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