Could Q2 earnings help Adobe’s share price?

Adobe System’s [ADBE] share price has designs on more record highs after soaring demand in the coronavirus pandemic.

Adobe’s share price jumped 30% from $411.67 on 16 June 2020 to $533.80 at the close on 2 September as businesses and individuals spent more time working and creating at home.

The stock then fell to $421.20 on 8 March 2021 as investors switched away from tech stocks — due to valuation fears in a potential high-inflation environment — to value and COVID-19 recovery plays.

However, Adobe’s share price rose again to $525.08 on 16 April, driven by strong first-quarter results for the creative and design software firm. Adobe’s share price dipped yet again to $472.09 on 12 May, but has recovered once more to reach a record $556.95 at close on 14 June. This marked an 11.4% rise for Adobe’s share price so far in 2021.

Can investors expect more good news for Adobe’s share price when the company reports its second-quarter results on 17 June?

Earnings growth

In its Q1 results, Adobe reported record quarterly revenues of $3.91bn, marking 26% year-over-year growth and a 38% rise in non-GAAP earnings per share of $3.14.

“Adobe’s Creative Cloud [including Photoshop], Document Cloud [including Adobe Sign] and Experience Cloud [providing marketing software and services] have become mission critical to all customer segments — from students to individuals to large enterprises — across the world,” said Shantanu Narayen, president and CEO of Adobe (pictured).

Analysts forecast that Adobe will report earnings of $2.81 per share, up 14.7% on the same period last year, and revenue growth of over 19% to $3.73bn. The company’s full-year 2021 revenue is projected to surge 20.4% to $15.5bn, with full year 2022 set to climb 14.3% higher. According to Benjamin Rains of Zacks Equity Research, this would “extend its streak of roughly 15% or stronger sales growth to eight straight years”, which he said was better than rival Microsoft [MSFT].

Design demand

Keith Weiss, equity analyst at Morgan Stanley, is also bullish. “Upside to Digital Media, positive checks in Digital Experience, and conservative operating margin forecasts for the second quarter make us buyers,” he said.

“Adobe has leading market share in some of the most dynamic secular growth areas in software: creative design, dynamic media, and marketing automation. As such, we see the longer-term growth story for Adobe as better than most.”

However, Weiss added this is not fully reflected in its shares. As such, he set a price target of $575, with a bull scenario of $698.

Derrick Wood, analyst at Cowen, has an outperform rating and a target of $600. "A mix of growth, profitability, market leadership and sustainable competitive advantage make Adobe an attractive stock for a wide variety of investors," he said.

Gregg Moskowitz, analyst at Mizuho, has a buy rating and a price target of $600. “Adobe’s comprehensive end-to-end offering not only differentiates it from competitors, but also positions it very well to benefit from digital transformation, which has become increasingly critical for businesses to remain competitive and agile in today’s environment,” he said. “Document Cloud is at the forefront of the paper-to-digital movement and Experience Cloud is poised to benefit from the rapid growth in ecommerce, and rising demand for better customer experiences anytime, anywhere.”

However, Brent Thill, investment analyst at Jefferies, believes Adobe has to “overcome headwinds affecting growth and software sectors” and has some executive “uncertainty”, following CFO John Murphy’s decision to retire this year. There are also concerns around whether businesses will continue spending on software if there is an economic downturn post-pandemic.

The International Data Corporation estimates that global businesses will spend $6.8trn on digital transformations between 2020 and 2023.

“[Adobe] is focusing in particular on mobile use cases, new forms of media, and artificial intelligence,” Trevor Jennewine wrote in The Motley Fool. “For instance, Photoshop Camera is a smartphone app that provides an array of filters and AI-powered features,” he noted.

Investors can keep track of Adobe in software-focused ETFs. As of 11 June, it had a 9.6% weighting in the iShares Expanded Tech-Software Sector ETF [IGV], which has a year-to-date total daily return of 5.85%. On 14 June, Adobe was weighted at 3.39% in the Global X Artificial Intelligence & Technology ETF [AIQ], which has a return of 8.98%.