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Morningstar | Adobe Reports Another Strong 4Q and Fiscal-Year Results; Shares Undervalued

Wide-moat Adobe reported strong fourth-quarter and fiscal 2018 results. It beat our internal and consensus expectations on revenue but missed slightly on the bottom line because of higher costs associated with the Marketo acquisition. The firm’s digital media and digital experience both increased the top line by double digits, driven by strength in creative, document, and overall subscription revenue growth. While the large acquisitions of Magento and Marketo contributed to the revenue increase, we were impressed by Adobe’s organic growth as demand from both consumers and enterprises remains robust. Management provided a fiscal 2019 outlook for the top line that exceeded our projections. However, its earnings guidance was below our estimate due to a possible write-down of deferred revenue related to the acquisitions in fiscal 2018. We are likely to maintain our $300 fair value estimate. With the shares trading at only a 0.83 price/fair value, we believe they have become very attractive for new investors.

Total fourth-quarter revenue came in at $2.46 billion, up 23% year over year. Digital media revenue was up 22% from last year as the contribution from Creative Cloud, which grew 25% from last year to $1.45 billion, remains strong. It appears that while Adobe continues to benefit from the cloud transition on both the consumer and enterprise fronts, it has also displayed pricing power, given the lack of any significant competition. Plus, Adobe’s efforts to tap into emerging markets with its creative offerings is paying off.

In the digital experience segment, the acquisitions of Magento and Marketo contributed slightly to the 25% growth, which resulted in revenue of $689.7 million during the quarter. The segment’s subscription revenue represented over 80% of total experience revenue, an improvement from last year’s 78%. With Magento and Marketo, we believe Adobe is now well positioned to provide an end-to-end marketing and advertising technology solution. The acquisition of Magento in May has enabled Adobe to provide not only the creativity tools for advertisers and ad agencies, but also the technology to design and create e-commerce sites on which those tools will perform best. With Marketo, Adobe is now providing businesses additional tools for lead management and marketing. We think both acquisitions are likely to strengthen the stickiness of Adobe’s offerings, further supporting our wide-moat rating.