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Why Adobe Systems Stock Has Jumped 39% So Far in 2018

By Asit Sharma - Jul 19, 2018 at 4:30PM

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The software pioneer continues to impress on multiple fronts while making strategic acquisitions to extend its content applications market share dominance.

What happened

Shares of creative software applications provider Adobe Systems Incorporated (ADBE -0.66%) rose 39.1% in the first six months of 2018, according to data from S&P Global Market Intelligence.

So what

Adobe continued the impressive performance of recent quarters in the first half of 2018. During the company's fiscal second quarter (three months ended June 1, 2018), Adobe's revenue achieved 24% year-over-year growth, setting a new quarterly record of $2.2 billion. Top-line gains were spurred by the organization's largest segment, digital media, which includes the professional content software Adobe Creative Suite. Digital media's revenue jumped 22% against the second quarter of 2017, to $1.55 billion. Similarly, the digital experience segment, which assists companies in multi-channel digital marketing campaigns, booked revenue growth of 18%, to $586 million.

Impressively, as Adobe grows larger, it keeps expanding its profitability. Operating margin has increased steadily over the last four years, roughly tripling to a current level of 32%. This ample margin is positively impacting cash flow: Adobe boosted operating cash flow by more than 50% in the second quarter of 2018 versus the prior-year period, to $976.4 million. The company is using some of its ongoing cash haul for shareholder-friendly actions: Last quarter, Adobe repurchased $700 million of its shares on the open market.

Female video editor working on edits on two monitors in contemporary office.

Image source: Getty Images.

Now what

Adobe is investing in extending its lead in content creation. Last month, the company completed the $1.68 billion acquisition of privately held Magento Commerce. Magento will enhance Adobe Experience Cloud, the company's enterprise-targeted content management system (CMS). Beginning in the third quarter, Adobe will merge Magento's "Commerce Cloud" into Adobe Experience Cloud, simplifying the creation of shopping sites for the software's users, and providing them with advanced commerce-related analytics.

It's possible that shares may take a breather at some point in the upcoming quarters given the tremendous run-up so far in 2018. However, its recent appreciation hasn't thrown Adobe into overvalued territory. Company stock trades at a forward price-to-earnings ratio of 38; that's a rich premium to the broader market, but in line with application software stocks in the S&P 500 index, which currently trade at an aggregate forward P/E ratio of 37. Given its sustained revenue and earnings growth at double-digit rates, and ascending profitability, Adobe arguably deserves a richer valuation.

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