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Why THIS COMPANY Is One of the Best Software Stocks Around

Why THIS COMPANY Is One of the Best Software Stocks Around

Posted On June 23, 2019 8:45 pm
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Digital transformation is sweeping across the globe, and the pressure on companies to update their customer experiences for the 21st century is on the rise. Despite ample competition, there is plenty of new business to go around. However, after yet another quarterly performance that exceeded expectations, digital content creation software provider Adobe (NASDAQ:ADBE) has proven it is a best-in-breed pick.

Building another year of huge growth

Adobe’s second-quarter revenue rose 25%, building on the same rate put up during the fiscal 2019 first quarter and topping management’s guidance. Full-year expectations for $11.15 billion in revenue was left unchanged — a 23% annualized increase — and third-quarter revenue results were forecast to be up 22%. Adobe does tend to under-promise and over-deliver, so investors were more than happy to focus on the first half of the year’s results.

Metric Six Months Ended May 31, 2019 Six Months Ended June 1, 2018 YOY Change
Revenue $5.35 billion $4.27 billion 25%
Gross profit margin 84.9% 87.4% (2.5 p.p.)
Operating expenses $3.10 billion $2.33 billion 33%
Adjusted earnings per share $3.54 $3.21 10%

DATA SOURCE: ADOBE. YOY = YEAR OVER YEAR. P.P. = PERCENTAGE POINT.

Though gross profit margins declined as Adobe added new services aimed at digital commerce — primarily through its big takeover of Magento and Marketo last year — the metric was still near a lucrative 85% rate. That’s substantially higher than some of Adobe’s software peers like salesforce.com (at 75.5% gross profit margin in its last quarter) and Shopify (at 56.3% gross profit).

With global digital change still a huge opportunity in front of it and growth well into the double digits, Adobe is keeping its foot on the gas. Operating expenses were up 33% in the first half of 2019, led by an increase in sales and marketing expenses to $1.63 billion. The higher expenses were the primary reason that adjusted earnings were up only 10% so far this year, handily trailing the top-line growth rate.

Not for the thrifty, but worth paying up

Adobe is nevertheless a very profitable enterprise, and though the software company’s bottom line isn’t growing as fast as one might expect, the company’s reinvestment back into itself will pay off later. With gross margins some of the best out there, growing sales as…

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