Adobe targets 22% EPS growth in $ 147 billion worth of markets
I see three reasons why his stock might increase. Adobe
- Targets large, fast-growing markets
- Is considered an industry leader
- Has strengths that should allow it to continue to grow rapidly
Third Quarter Results Beat and Increase
Adobe is used to exceeding expectations and improving advice. As I wrote in April, this is what he did in Q1 2021 when his revenue grew 26% to $ 3.91 billion and he forecast 20% growth at 15, $ 45 billion for 2021.
As then-CEO Shantanu Narayen said, “Adobe generated record first quarter revenue and we are increasing our annual targets based on the tremendous opportunities our business offers and our continued confidence in our global execution. ”
On September 22, Adobe beat and rose when it released its third quarter results. As Investor’s Business Daily reported, Adobe’s third-quarter sales rose 22% to $ 3.94 billion, $ 50 million more than analysts expected, while profits rose by 21%.
In addition, Adobe has raised its forecast for the fourth fiscal quarter. The company estimated that revenue would rise 20% to $ 4.07 billion, $ 30 million more than analysts modeled, while Adobe expects earnings per share to rise 22% at $ 3.18, or 10 cents per share more than the consensus.
Still, its stock fell 3.1% as a result of the report and on October 15, Adobe was trading 5.6% below its price the day before its third quarter earnings report.
Investors ditched its shares because Adobe did not grow as quickly in two of its business units as analysts had expected. How? ‘Or’ What? The company “failed to meet annual recurring revenue expectations in its core digital media business and experienced more unfavorable seasonality than expected in its Creative Cloud business in the last quarter,” IBD reported.
Targets large, fast-growing markets
Has Adobe peaked? It targets very large and rapidly growing market opportunities.
Adobe has three cloud computing companies. Its largest, Creative Cloud, includes software for creative professionals such as Photoshop and Illustrator. Document Cloud includes its Acrobat and e-signature offerings. Experience Cloud provides marketing software and services.
These companies are targeting markets that Adobe estimates will be worth $ 147 billion by 2023. Creative Cloud targets a Total Addressable Market (TAM) that is expected to grow at an annual rate of 32% to reach $ 41 billion by 2023. , according to a presentation from a meeting of Adobe financial analysts. Document Cloud’s TAM is accelerating at an annual rate of 62% to reach $ 21 billion by 2023 and Experience Cloud’s TAM is increasing at an annual rate of 15% to reach $ 85 billion by 2023.
These cloud businesses are benefiting from strong tailwinds that continue to propel their growth.
The Creative Cloud is driven by the proliferation of storytelling. As Anil Chakravarthy, executive vice president and general manager of Adobe, Digital Experience Business and Worldwide Field Operations, told me in an interview on October 11: “As the leader of the organization in the field that sells the three products, I see what drives growth. Content keeps growing because everyone – individuals and corporate communicators – has a story to tell and new media are making it possible. That’s what drives Creative Cloud.
Adobe’s Document Cloud is growing because paper users are still making the transition to the digital economy. As he put it, “Mortgages, health care claims and many government forms are still on paper. The Document Cloud helps them make the transition to digital. It is difficult to quantify the share of our potential market having made the transition to digital; but one of our clients keeps track of how many faxes he receives – they still receive hundreds of millions a year.
Adobe’s Experience Cloud aims to enable its business customers to sell at a higher price. How? ‘Or’ What? All businesses, whether they sell to other businesses or directly to consumers, are increasingly trying to match the customer experience provided by companies like Amazon.
As Chakravarthy explained, “Every business, whether BTB or BTC, aspires to provide their customers with a good digital experience. If you can’t differentiate yourself with a better customer experience, you can’t charge extra. We deliver tools that empower businesses to deliver the right digital experience – using data to [optimize] an operating model of discovery, trial, purchase, use and renewal.
Judged as an industry leader
While I couldn’t find any data on Adobe’s market share and ranking across its three lines of business, analysts consider Adobe to be an industry leader.
For example, Forrester
In my book, Disciplined growth strategies, I explained how companies become and stay market leaders. The short answer is that they do two things:
- Outperform its competitors in meeting customer purchasing criteria (CPC)
- Leverage the capabilities needed to deliver consistent and superior value to customers
Adobe has extensive knowledge of the CPC of its Experience Cloud customers. As Chakravarthy explained, “[Customers choose among competing vendors based on who has] the necessary capacities of the product, their degree of integration. whether the company will be a good long-term partner, and [which vendor has the most favorable] total cost of ownership and return on investment (ROI).
Customers concretely measure the ROI of Experience Cloud. As he said, they are evaluating whether it helps them increase their revenue, retain their customers, improve their loyalty – as measured by the promoter’s net score, and lower their service costs.
Capabilities should enable Adobe to grow rapidly
Adobe also has the capabilities to compete in its current markets and to create new growth opportunities.
According to Chaktavarthy, Adobe satisfies the CPC of its Experience Cloud customers by deploying features such as
- A content management system that provides product information through a website and mobile app
- A digital storefront that allows businesses to sell goods and services to consumers and businesses
- A customer experience system that tracks how users interact with the business
- Software to manage an omnichannel customer journey – via email, the web, mobile apps or call centers; and
- Automated processes to manage the workflow
Adobe’s long-term success depends on its ability to reinvent itself. Narayan – who has been CEO since 2007 – presided over Adobe’s market capitalization increase from $ 24 billion to $ 276 billion, according to The Economist.
Early in his tenure, Narayen realized that with the growing popularity of smartphones and the cloud, Adobe would have to reinvent itself. As he told The Economist, “Software follows a sort of S-curve: performance ends up moving sideways if you don’t invest in the right opportunities. ”
Adobe achieved this through what seemed to me to be unique approaches to product innovation and leadership style.
Adobe uses what it calls a data-driven operating model that obtains feedback on how customers use its digital services and applies the resulting information to improve its products, reported The Economist.
Plus, Narayan handles it differently. Rather than telling his direct reports what to do exactly, he sets a specific performance goal and leaves the leaders of the three clouds to determine how to achieve that goal.
For example, Narayan set a goal that “Adobe’s data platform must be able to deliver content in less than a tenth of a second.” He left it up to engineers to achieve that goal, The Economist reported.
I think this approach works well because it combines Narayan’s ideas on how to satisfy his customers while inspiring technical creativity in his engineers.
Over the past decade, Adobe stock has grown at a compound annual rate of 36.5%, surpassing the 13.8% of the S&P 500. I am holding Adobe stock because I believe it will continue to outperform over the long term.