Please ensure Javascript is enabled for purposes of website accessibility

Why Adobe Stock Climbed 29% in 2018

By Keith Noonan – Updated Apr 18, 2019 at 9:02PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Adobe has transformed its business and quadrupled its stock over the last five years.

What happened

Shares of Adobe (ADBE -0.92%) gained 29.1% in 2018, according to data from S&P Global Market Intelligence. The company's recurring revenue model helped power strong sales and earnings gains and drove shares to handily outperform the market last year. 

^SPX Chart

^SPX data by YCharts.

Moving market-leading design software like Photoshop and Illustrator to a subscription-based distribution model has yielded great results for Adobe; growth in international markets and pushes into e-commerce and enterprise services are helping to drive strong performance and expand the company's ecosystem.  

Two people looking at a laptop screen.

Image source: Getty Images.

So what

Adobe shares climbed gradually across 2018 but retraced some gains following the company's fourth-quarter earnings release and guidance in mid-December. Management's earnings target fell short of analyst expectations, but the year-end sell-offs also occurred amid dramatic market declines and likely reflected an increasingly cautious mood among investors. Even with substantial sell-offs to close out the year, Adobe shareholders still had plenty to be happy about with the company's 2018 performance.

Adobe's transition from one-time sales to a software-as-a-service model has been hugely successful, and its acquisition of cloud marketing software firm Marketo and e-commerce platform Magento could help power its next growth stages. Adobe continued to record strong sales growth across 2018; it has now reported comparable sales growth for 15 quarters straight and sales growth of at least 20% for 14 consecutive quarters.

Now what

For fiscal 2019, Adobe expects adjusted earnings per share of $7.75 on sales of $11.15 billion. Shares trade at roughly 30 times the year's expected earnings and 10 times expected sales. That's a growth-dependent valuation that will require that the company continue to execute at a high level. However, the business is showing undeniable momentum, and Adobe's leading position in design software, combined with its heightened push into marketing, enterprise services, and e-commerce, gives the business paths to exceeding expectations.

Check out the latest Adobe Systems earnings call transcript. 

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Adobe Systems. The Motley Fool has a disclosure policy.

Stocks Mentioned

Adobe Stock Quote
$340.94 (-0.92%) $-3.17

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.