It's taken just a month to wipe out nearly a year's worth of gains for high-flying software stock Adobe (ADBE 0.89%). The coronavirus panic is sweeping through markets, and nothing is being spared -- not even high-quality growth outfits that are key ingredients to the digital transformation movement spreading across the globe.
Nevertheless, while Adobe did forecast some business disruption due to the pandemic in the next couple of quarters, investors who have been waiting for a dip to jump on this stock have been given a gift.
A pretty good start to the year, all things considered
Adobe's primary segment, digital media, grew 22% year over year during the fiscal 2021 first quarter (three months ended Feb. 28, 2020). Digital media's annual recurring revenue (or ARR, a common metric for subscription-based and cloud computing business models) increased $400 million sequentially from the previous quarter to $8.73 billion, a stunning 5% quarter-over-quarter increase for a business this large.
Digital experience -- Adobe's cloud offering for business-to-business and e-commerce management -- also put up respectable numbers, growing 15% from a year ago to $858 million.
|
Metric |
3 Months Ended Feb. 28, 2020 |
3 Months Ended Mar. 1, 2019 |
Change |
|---|---|---|---|
|
Revenue |
$3.09 billion |
$2.60 billion |
19% |
|
Gross profit margin |
85.4% |
84.7% |
0.7 pp |
|
Operating expenses |
$1.70 billion |
$1.51 billion |
13% |
|
Earnings per share |
$1.96 |
$1.36 |
44% |
|
Adjusted earnings per share |
$2.27 |
$1.71 |
33% |
PP = percentage point. Data source: Adobe.
The bottom-line results were even more impressive with higher gross margin on services rendered, slower operating expense growth, and management's share repurchases leading to a 33% increase in adjusted earnings per share. Those results include a negative $0.07 per-share impact due to the cancellation of corporate events over coronavirus. Not too shabby.
Image source: Adobe.
Why there's no need to sweat over this stock
But what about the future? After all, businesses are valued based on their future potential, and the growing lockdown to combat coronavirus is sure to have an adverse effect.
Adobe did say it sees a slowdown in new bookings and marketing spend from its customers that is going to put a damper on growth in the fiscal second quarter. As for specifics, the company said to expect digital media to grow 19% year over year and log an additional $385 million in ARR over the first quarter, while digital experience should grow 12% year over year. Adjusted earnings per share guidance of $2.35 would equate to an increase of 28%. It is a slowdown, but it looks like Adobe will fare just fine.
Companies like Adobe that are helping organizations around the globe with their digital transformation are not in trouble right now. In fact, though there are undoubtedly going to be some short-term hiccups, COVID-19 could wind up making this software outfit even stronger by pushing many businesses to adapt to a digital world faster than they were prior to the pandemic.
But what if things get really bad, like global recession bad? While certainly not ideal as Adobe is priced for fast growth for the foreseeable future (34 times trailing 12-month free cash flow), software that is integral to business operations and customer experience management is far down the list of items likely to get cut from corporate budgets. Put simply, though shares remain at a premium even after the recent market bloodbath and Adobe's stellar report, this is a resilient tech stock worth owning for a long time.
