In the intense competition among tech stocks, this well-known company has enjoyed a strong growth spurt due to its Creative Cloud package.
The company’s strong balance sheet supports high research spending, and a long-term influx of cash from the new U.S. tax reform will fund further growth. Currently the shares are trading at a high level to projected earnings.
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ADOBE SYSTEMS INC. (Nasdaq symbol ADBE; www.adobe.com) makes software that lets computer users create, edit and share documents in the popular PDF format. Graphic designers also use its programs to create print publications and web pages.
Adobe continues to benefit from strong demand for its subscription services, especially for its Creative Cloud package of photo-editing and desktop-publishing programs.
In its fiscal 2017 fourth quarter, ended December 1, 2017, the company earned $1.26 a share. That’s up 40.0% from $0.90 a year earlier. Adobe’s revenue also jumped, rising 24.8% to a record $2.01 billion from $1.61 billion.
The company continues to move away from the sale of software as a one-time purchase; it now gets 84% of its revenue from recurring sources (subscriptions).
Adobe also spends a high 17% of its sales on research. That helps it compete in a rapidly changing industry.
The company’s balance sheet supports that spending. At the end of the latest quarter, Adobe held cash of $5.8 billion, or $11.77 a share. About $4 billion of it was held overseas, and Adobe will book an $85 million charge as a result of the new tax rules. Its long-term debt is also a very low $1.9 billion.
Growth stocks: Repatriated cash could fund workforce, acquisitions, share buybacks
Recent reforms to the U.S. tax code will see companies repatriate the cash they hold in overseas accounts. That cash will be taxed at 15.5% instead of 35% as under the old rules. Adobe holds cash of $5.8 billion, and about 89% of that is held offshore.
While those payments will hurt short-term earnings, the new rules also cut their corporate tax rate to 21% from 35%. That should spur long-term earnings.
The company plans to use some of the repatriated cash to expand its campuses in the San Francisco Bay Area and Utah in order to accommodate the growth of its employee base. It could also use some of the funds to make acquisitions, or to continue buying back its stock. Adobe does not pay a dividend.
The companhy’s stock trades at a high 32.4 times the $6.25 a share Adobe will likely earn for fiscal 2018. Moreover, it gets 40% of its revenue from Europe and Asia, and the high U.S. dollar hurts their contribution.
Recommendation in Wall Street Stock Forecaster: Adobe Systems is a hold.
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The Successful Investor Inc. and its affiliate Successful Investor Wealth Management (referred to hereafter as TSI Network) know that you care how information about you is used and shared, and we appreciate your trust that we will do so carefully and sensibly. This notice describes our privacy policy. By visiting websites owned by or associated with TSI Network, you are accepting the practices described in this Privacy Policy.
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