Software giant Adobe Inc. (ADBE) recently posted strong third-quarter results, with its EPS beating the consensus estimate. The company offers products and services that professionals, marketers, knowledge workers, application developers, enterprises, and consumers use for creating, managing, measuring, optimizing, and engaging with compelling content and experiences.

In the third quarter, ADBE’s Digital Media business reported $3.23 billion in revenue, and the net new Digital Media Annualized Recurring Revenue (ARR) came in at $449 million. Its total Digital Media ARR exiting the third quarter grew to $13.40 billion. In addition, its Experience Cloud business achieved $1.12 billion in revenue, and subscription revenue was $981 million.

Last month, the company announced the acquisition of Figma. ADBE expects to close the deal in 2023. Figma has a total addressable market of approximately $16.50 billion by 2025; this is expected to bolster ADBE’s topline significantly.

However, the U.S. Department of Justice is preparing to investigate the deal on antitrust concerns and has reached out to both companies' customers and competitors and reached out to Figma’s venture capital investors. ADBE has vehemently denied that Figma is a competitor and is working closely with the regulators to provide transparency and close the deal.

For the fourth quarter, the company expects total revenue of approximately $4.52 billion. It expects a net new Digital Media ARR of approximately $550 million. It expects non-GAAP EPS of approximately $3.50. ADBE also expects the fiscal 2023 revenue to come between $19.10 billion and $19.30 billion, higher than its projected fiscal 2022 revenue of $17.60 billion.

The stock has declined 49.6% in price year-to-date and 57.6% over the past year to close the last trading session at $285.75. Wall Street analysts expect the stock to hit $367.22 in the next 12 months, indicating a potential upside of 28.5%.

Here’s what could influence ADBE’s performance in the upcoming months:

Robust Financials

ADBE’s total revenue increased 12.6% year-over-year to $4.43 billion for the third quarter ended September 2, 2022. The company’s net cash provided by operating activities increased 20.4% year-over-year to $1.70 billion. Its non-GAAP operating income increased 7.9% year-over-year to $1.95 billion.

In addition, its non-GAAP net income increased 6.6% year-over-year to $1.59 billion. Also, its non-GAAP EPS came in at $3.40, representing an increase of 9.3% year-over-year.

Revenue and EPS Growth Estimates

Analysts expect ADBE’s EPS for fiscal 2022 and 2023 to increase 9.2% and 12.9% year-over-year to $13.62 and $15.38, respectively. In addition, its revenue for fiscal 2022 and 2023 is expected to grow 11.6% and 10.7% year-over-year to $17.62 billion and $19.50 billion, respectively.

High Profitability

In terms of the trailing-12-month gross profit margin, ADBE’s 87.76% is 74.7% higher than the 50.22% industry average. Likewise, its 39.14% trailing-12-month EBITDA margin is 222.8% higher than the industry average of 12.12%. Furthermore, the stock’s 35.45% trailing-12-month EBIT margin is 395.5% higher than the industry average of 7.15%.

POWR Ratings Show Promise

ADBE has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. ADBE has an A grade for Quality, consistent with its higher-than-industry profitability.

ADBE is ranked #30 out of 145 stocks in the Software - Application industry. Click here to access ADBE’s Growth, Value, Momentum, Stability, and Sentiment ratings.

Bottom Line

Although the deal to acquire Figma is under antitrust investigation, ADBE is confident of closing the deal next year. Despite the high price being paid for Figma’s acquisition, its total addressable market is strong, and the acquisition will help ADBE drive its growth in the long term. Furthermore, the company’s outlook for the fourth quarter and fiscal 2023 remains strong.

Given its robust financials, favorable analyst estimates, and high profitability, it could be wise to invest in the stock to benefit from its potential upside.

How Does Adobe Inc. (ADBE) Stack Up Against Its Peers?

ADBE has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Software - Application industry with an A (Strong Buy) or B (Buy) rating: Commvault Systems, Inc. (CVLT), IBEX Limited (IBEX), and eGain Corporation (EGAN).

ADBE shares were trading at $289.98 per share on Monday morning, up $4.23 (+1.48%). Year-to-date, ADBE has declined -48.86%, versus a -19.81% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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