After the run Adobe System Inc. (ADBE) has had, can it keep its head in the clouds or is its valuation becoming a concern?
Adobe reports results for its fiscal third quarter, which ended Sept. 1, after today's close. Year to date, the stock is up 51%. I have been bullish on shares of Adobe all year. Back in March I thought the stock would plow through $120 on its way to $140, but now, with the stock over $155, I'm concerned about the valuation.
Analysts are looking for third-quarter earnings of $1.01 a share on $1.817 billion in revenue.
Since Adobe successfully transitioned from selling software licenses to cloud subscriptions, the stock has been on fire. Analysts are looking for fiscal 2017 revenue to grow 23% to $7.22 billion. Next year, the consensus thinks the company can grow the top line nearly 20% more to $8.6 billion.
The transition to the cloud began in 2011, when Adobe began to force users to subscribe to its Creative Cloud offering instead of renewing their software license. The transition wasn't without problems. Adobe struggled to grow for a few years. But as customers adopted the cloud, revenue growth picked up. In 2015 revenue grew 16% and climbed 22% in 2016. Likewise, earnings bottomed out at $0.53 per share in fiscal 2014 and are expected to be $4.06 this year.
Investors will be listening for an update on Adobe's acquisition of TubeMogul. Last quarter Adobe completed the acquisition of TubeMogul and updated guidance. TubeMogul enables brands and ad agencies to plan and buy video advertising across desktops, mobile devices, streaming platforms and television. The acquisition now allows marketers to unify audience planning and media buying into one streamlined platform.
When combined with Adobe's Marketing Cloud, which is mostly direct-response advertising, Adobe will become a powerhouse ad manager. Ad agencies can buy display ads, ads on social sites, desktops, mobile, television and streaming, and they will be able to get detailed performance statistics across all those devices in one place.
Advertising represents an estimated $7 billion opportunity for Adobe.
After this quarter, investors will begin to look forward to next year. Analysts think Adobe will earn $5.10 a share in fiscal 2018. At the current quote, the stock is trading at 30 times forward estimates, which seems like a pretty rich valuation. The consensus price target is $161, or only 4% away from the current stock price. Of the 28 analysts who publish on the stock, 23 rate the shares a "Strong Buy" or "Buy."
While I'm still excited by Adobe's future prospects, the valuation has me rethinking my bullishness. I think it's time for the stock to rest and I would look for a better entry point.