We're raising our fair value estimate on the wide-moat firm.
By Rodney Nelson | 06-20-17 | 11:45 PM | Email Article

 Adobe’s second-quarter results reflected an ongoing theme for the company--broad-based adoption of its holistic solutions for content creating and digital marketing. The firm continues to port legacy Creative Suite users to its Creative Cloud offering, while the addition of TubeMogul has yielded the deepest digital marketing cloud offering on the market, in our view. We continue to view Adobe as one of the best-run software companies in our coverage, and we are maintaining our wide moat rating. After incorporating a rosier medium-term growth outlook and modestly lower long-term tax rates, we are lifting our fair value estimate to $155 per share, up from $130 previously, though we would wait for a wider margin of safety before investing.

Rodney Nelson is a senior equity analyst for Morningstar.

Second-quarter revenue rose 27% versus the prior-year period to $1.77 billion, driven once again by strong subscription revenue growth. While Adobe’s Creative Cloud migration has been the more ballyhooed portion of the firm’s strategy, we continue to be impressed with management’s execution on the growing Digital Marketing business. The TubeMogul linear TV advertising acquisition further solidifies Adobe’s status as the most holistic omnichannel marketing software vendor, and the Marketing Cloud segment delivered 29% growth in the quarter. We were also encouraged to see strong performance from the Asia-Pacific region in the quarter, an area where Adobe had experienced myriad challenges prior to its cloud transition. APAC revenue rose 36% year over year, representing Adobe’s fastest-growing geography.

Management continues to excel at managing expenses while capturing growth perhaps better than any large-cap software company, as GAAP operating margins expanded roughly 380 basis points to 28.4%. We believe this figure is impressive in light of depressed Digital Marketing gross margins that are being weighed down by the integration of the TubeMogul acquisition.

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