Which direction will Adobe’s share price take after earnings?

Adobe’s [ADBE] share price has managed to maintain a steady trajectory for most of 2020. 

Despite a significant slump that pushed it as low as $283 before closing at $285 on 12 March — the stock’s lowest closing value so far this year — Adobe’s share price has since gone on to experience some exceptional gains.

Adobe’s share price hit an all-time high of $536.88 during intraday trading on 2 September, before closing at $533.80 — up 61.85% year-to-date.

Although Adobe’s share price has since fallen 11.7% to close at $471.35 on 11 September, the stock is still up 40.94% year-to-date.

As the company prepares to announce its third-quarter earnings, due 15 September, what should investors expect for Adobe’s share price?

Q2 results send Adobe’s share price down

When Adobe released its second-quarter results on 11 June, it reported earnings of $2.45 per share, which surpassed the Zacks consensus estimate of $2.35, marking a 4.3% surprise. This figure represented an increase of 7.9% from the previous quarter and 28.4% year-on-year — it was also the fourth consecutive quarter where Adobe beat earnings estimates.

For the quarter ended 29 May, Adobe posted revenue of $3.13bn, up 14.2% year-on-year, but missing consensus estimates by 1.5%.

Despite the company’s second-quarter earnings beating expectations, the stock fell 4.71% due to lower-than-anticipated guidance for the third quarter.

In a statement released alongside the results, Shantanu Narayen, president and CEO said: “The tectonic shift towards ‘all things digital’ across all customer segments globally will serve as a tailwind to our growth initiatives as we emerge from this crisis.”

“The tectonic shift towards ‘all things digital’ across all customer segments globally will serve as a tailwind to our growth initiatives as we emerge from this crisis” - Shantanu Narayen, president and CEO

“We drove record Digital Media net new ARR [annualised recurring revenue] for Q2, highlighting how mission-critical creative and document solutions are in engaging remotely,” he added. ARR grew by $443m during the quarter, pushing its total to $9.17bn, while creative ARR grew to $7.93bn.

Looking ahead to the upcoming earnings call, analysts are expecting Adobe to post earnings of $2.40 per share, which would represent a growth of 17.07% year-on-year. As for revenue, analysts expect Adobe to have generated $3.15bn for the quarter, an 11.24% growth from the same time last year.

For the full year, Zacks expect earnings of $9.77 per share and revenue of $12.71bn — up 24.14% and 13.81%, respectively, from last year.  

Is Adobe a buy or a hold ahead of earnings?

Following the release of its second-quarter earnings, Cowen boosted its target for Adobe’s share price from $365 to $400, and gave it a "market perform" rating, according to MarketBeat. However, analysts at Oppenheimer have a more bullish outlook, setting a $430 price target and a Buy rating on Adobe stock on 12 August.

Adobe has a consensus Hold rating from Zacks Equity Research, which is less optimistic than the consensus among 27 analysts polled by CNN Money to Buy the stock. This rating is held by a majority of 16 analysts, with only eight suggesting to Hold, two giving it an Outperform rating and one rating it a Sell.

The median 12-month price target among 23 analysts polled by CNN Money is $440, with a high estimate of $575 and a low of $375. The median price represents a 6.7% decrease from Adobe’s 11 September closing price.

“Adobe's record revenue during the quarter wasn't a fluke, either. The company has produced record revenue in every quarter going back more than five years” - Danny Vena

“Adobe's record revenue during the quarter wasn't a fluke, either. The company has produced record revenue in every quarter going back more than five years,” said Danny Vena, writing for The Motley Fool.

“Is Adobe stock a buy? I'd argue the answer is an unqualified yes,” he continued. “Even at a rather pricey valuation, investors have been willing to pay up for quality. The company's legacy business is still growing at an impressive rate, while its more recent forays into enterprise, e-commerce, and marketing have long runways ahead.”

Adobe share price vitals, Yahoo Finance, 14 September 2020