Creative software leader Adobe (NASDAQ:ADBE) announced on Wednesday that it will be reporting Q4 and fiscal year 2019 earnings on Thursday, Dec. 12. Adobe stock has performed well this year, and at $303.03 it is up 34% so far in 2019. Will that growth continue? Here’s what to expect from Adobe next week.
Adobe will be reporting both its fourth-quarter and fiscal year 2019 earnings after the bell next Thursday. The first hint of what to expect came when the company updated investors on its third-quarter performance.
Q3 Reaction to Q4 ADBE Earnings Guidance
The company’s Q3 earnings report on Sept. 17 resulted in ADBE stock dropping as much as 4% in after hours trading, before closing down 1.7% the following day. The reason for the negative market reaction? It wasn’t the company’s Q3 performance (it beat analyst expectations on both revenue and earning), but softer than expected guidance for Q4.
Adobe told investors to expect EPS of approximately $2.25 per share on revenue for the quarter of roughly $2.97 billion. CNBC reported at the time that analysts had been expecting EPS of $2.30 per share on $4.03 in revenue. Coming in under expectations with that Q4 guidance spooked the market, resulting in a loss for ADBE stock instead of the gain one might expect for the Q3 beat.
Following the negative reaction to the Q4 guidance, Adobe stock had a rocky patch for just over a month, eventually bottoming out at $261.09 on Oct. 22 before beginning a rally that extended to the end of November. Whatever trepidation the market had been feeling appears to have passed.
Factors That Could Impact Adobe’s Q4 Earnings
In June, ADBE unveiled its new AI-powered Adobe Experience Cloud, an update to its enterprise marketing and analytics offerings. That division saw slightly lower-than-expected earnings in Q3, but Adobe said at the time it would be boosting its investment in sales generation.
It also delivered a big win with Rite Aid (NYSE:RAD), announcing in June that it would adopt Adobe Experience Cloud. If the promised marketing boost pays off, the company’s enterprise revenue should get back on track for Q4. Creative Cloud business was up 22% year-over-year in Q3. In its guidance, the company says it expects to see 20% growth in Q4. That business accounted for 69% of Adobe’s Q3 revenue, so if it comes out even slightly ahead of projections and closer to Q3 growth levels that will make a big difference.
What about China? The trade war between the U.S. and China has impacted the performance of many tech stocks this year. However, Adobe says it has minimal exposure for either its creative or enterprise businesses.
One thing thing to keep in mind — despite the soft guidance for the quarter — is that in three out of the last four quarters, Adobe has beaten consensus EPS estimates.
Bottom Line for Adobe Stock
Adobe is one of those tech companies that successfully upended its business model to adapt to changing times. The company went from selling boxed software customers would buy a new version of every three to five years, to providing cloud-based monthly subscription access to its apps. After more than a decade of tepid growth, since going to a subscription-only model with its “Creative Cloud” in 2013, ADBE stock has grown in value by over 600%.
Among investment analysts it’s a consensus “buy” with a $323 median 12-month stock price target. Not spectacular performance expected there — especially in comparison to the 34% growth posted in 2019 — but there’s still upside.
Regardless of what happens in the short-term after the company’s earnings report on Dec. 12, Adobe remains a solid long-term investment.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.