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3 Reasons Adobe Stock Could Rise

By Steve Symington - Mar 30, 2016 at 7:15PM

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From growing Cloud subscribers to momentum in recurring revenue, why shares of the creative software company could be poised to pop.

More Creative Cloud subscribers are finding Adobe through its mobile apps. Image source: Adobe Systems Incorporated

When Adobe Systems Incorporated (ADBE 2.94%) released its strong fiscal first-quarter 2016 results earlier this month, it was no surprise to see shares of the creative software specialist climb as much as 6% the following day. Revenue rose a solid 24.7% year over year, to $1.38 billion, while adjusted net income climbed an even more impressive 48.3%, to $332.6 million, or $0.66 per share. Both figures easily beat Adobe's guidance provided three months ago.

However, Adobe stock has largely treaded water since then, and, thanks to a rough start to the year as the broader market pulled back, Adobe's year-to-date return is still slightly negative as of this writing. But that's not to say Adobe can't build on its recent momentum and continue climbing. Here are three positive catalysts that could propel Adobe shares higher from here:

1. (New) cloud subscribers are piling on
First, Adobe managed to add an impressive 798,000 net new Creative Cloud subscriptions in its most recent quarter, bringing total Creative Cloud subscribers to roughly 6.97 million. And these aren't just existing customers migrating from Adobe's legacy perpetual license model. According to CEO Shantanu Narayen, 30% of Adobe Creative Cloud customers are new to Adobe, and many are coming to the company through its popular mobile apps.

During the Q&A portion of this quarter's conference call, Narayen elaborated that Adobe's mobile apps are a "great top of the funnel in terms of the new creators getting interest in Adobe," and these users tend to go on to also subscribe to and download Adobe's desktop applications. If Adobe can continue riding this tailwind by bringing more of its mobile users into the Cloud subscriber fray, the future of its burgeoning cloud-based business model should be very bright indeed.

2. Digital Media ARR is gaining steam
Given the strong adoption of Creative Cloud, Adobe also saw digital media segment revenue increase 33% year over year, while annualized recurring revenue (ARR) climbed $246 million last quarter to bring total digital media ARR to $3.13 billion exiting the quarter. This predictable stream of recurring revenue is obviously preferable to the more chunky sales on which Adobe formerly relied when it was primarily a perpetual license-based business.

As a result of this momentum, Adobe was able to increase its digital media ARR growth target for this fiscal year to $1 billion -- up from its previous goal of $738 million -- which would bring total digital media ARR for the year to a whopping $4 billion exiting fiscal 2016. With Adobe's flat stock performance so far this year in mind, it seems the market simply isn't recognizing the incremental strength reflected by Digital Media ARR momentum and this increased guidance.

3. Generous capital returns
Finally, don't forget Adobe approved a new $2 billion stock repurchase plan in late January, of which roughly $1.48 billion remained as of the end of last quarter. And this plan isn't particularly new. Rather, it replaced a similar $2 billion authorization put into place in 2012 that was exhausted by the end of last year. And even that repurchase plan replaced a $1.6 billion authorization that ran through the end of fiscal 2012. 

In short, Adobe has a long history of using its cash to not only offset the dilutive effects of share-based compensation plans, but also reward shareholders for their patience by increasing the value of remaining shares as the company's long-term growth story plays out.

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