Adobe (NASDAQ: ADBE) has secured its place among legacy tech companies by effecting a significant turnaround centered on the cloud. Its cloud-based creative tools are in high demand worldwide, and now, with AI in the picture, the company is outpacing the competition. Its lean into AI-powered creative services opens the door to several growth opportunities, including increased market share, deepening penetration of its market, pricing power, and earnings leverage.

The takeaway is that Adobe is fundamental to the AI revolution and a buy-and-hold stock for investors that can stand a little volatility. 

Adobe Has Golden Quarter; Shares Retreat to Buy Zone

Adobe had a fantastic quarter, but its results and guidance aligned with the Marketbeat.com consensus, which is no catalyst for higher prices. The critical factors include revenue of $4.89 billion, up 10.4%, driven by double-digit growth in all segments. Digital Media grew by 11%, driven by a 13% increase in Document Cloud and an 11% gain in Creative. Digital Experience grew by 10% to aid a slim beat on the top line. 

The margin news is even better. The company expanded margins at the gross and operating levels to substantially improve the bottom line. The adjusted $4.09 is up 20% compared to last year, outpacing the top-line growth by nearly 1000 basis points and the consensus estimate by 270. This performance drives solid cash flows for the company, as seen on the balance sheet and in share repurchases. 

The company’s balance sheet is rock-solid. It is carrying debt, but it’s net cash and cash is up about 50% YOY to over $6.6 billion. This has assets on the rise while liabilities hold steady and investors' equity rises. A healthy repurchase program aided investors' equity, which gobbled up 2.1 million shares over the past quarter. The share count is down 2.15% compared to last year and is expected to continue falling. 

Adobe Provides Solid Guidance: Margin To Widen

Adobe provided solid guidance, with Q4 revenue expected in the range of $4.975 billion to $5.025 billion, compared to the consensus of $5.0 billion. That implies about 11% growth, an acceleration compared to last quarter and last year. The only downside is that it aligns with the consensus expectation and was not a catalyst for the market. 

The guidance does provide a cushion for the market due to the outlook for accelerated growth and wider margins. The EPS targets have earnings of at least $4.10 compared to the $4.06 consensus, which may be cautious. The company displays momentum and leverage, which could easily become an outperformance this quarter. 

“We are unleashing a new era of AI-enhanced creativity around the world with innovations across our product portfolio,” said Shantanu Narayen, chair and CEO of Adobe. “The recent launches of Firefly, Express, Creative Cloud and GenStudio make Adobe magic available to millions of users.”

Analysts Are Driving Adobe Higher 

Marketbeat.com didn’t pick up any analysts' revisions within the first 12 hours of the release, but there is no reason to expect much change. The revenue performance and outlook align with the consensus estimates and include strength on the bottom line. The market appears to be frothy; it has outpaced the consensus estimate, but the trend in sentiment is leading the market higher and should continue to do so this year. 

There are 9 fresh revisions posted in September ahead of the release, and all are bullish. Eight of the 9 include price target upgrades, while the 9th includes a boosted price target and a rating upgrade to Buy. Together, those 9 rate this stock a Buy with a target near $615 compared to the consensus of $545 or about 12% above the current action. 

Shares of ADBE are pulling back following the release. The action has the market down about 3% and may fall further, but it is still above critical support. Critical support is near $515 and should produce a solid signal when/if reached. If this market confirms support above that level, the next rally could develop before the end of the year.