1 updated software stock to add to your watchlist

Adobe's (ADBE) second quarter financial results were promising, with solid revenue growth across all segments. The stock was recently upgraded from neutral to long in our proprietary rating system. Therefore, it might be worth adding this stock to your watchlist. Keep reading….

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Adobe Inc. (ADBE) operates as an internationally diversified software company. It operates through three segments: Digital Media, Digital Experience, and Publishing & Advertising. The stock has gained 1.1% over the past month to close its last trading session at $391.96.

“Adobe achieved record second-quarter revenue with strong demand across Creative Cloud, Document Cloud and Experience Cloud,” said Shantanu Narayen, President and CEO. He also said, "We delivered another quarter of strong financial results, with more than $2 billion in operating cash flow, demonstrating the strength of growing revenue streams and financial discipline at Adobe." /p>

Given ADBE's strong financials, our proprietary POWR rating system has moved the stock from Neutral to Buy.

Here's what could shape ADBE's performance in the short term:

Latest developments

Last month, ADBE announced innovations for its customer data platform (CDP), Adobe Real-Time CDP, to help brands transition from third-party cookies to first-party data. As businesses across industries adopt Adobe Real-Time CDP, ADBE introduces enriched customer profiles with commerce, AI-based targeting, new privacy and security tools, and segment matching across all channels .

In addition, last month ADBE expanded its partnership with The Home Depot to enhance the customer experience. As part of the company's interconnected retail strategy, a seamless experience extends to e-commerce, an award-winning mobile app and in-store services such as pick-up lockers and a product locator integrated into the app. With so many touchpoints, the ADBE partnership will provide comprehensive insights into the customer journey.

Strong finances

ADBE's total revenue increased 14.4% year-over-year to $4.39 billion for the second quarter ended June 3, 2022. Its non-GAAP operating income increased increased 12% from its prior year value of $1.97 billion, while GAAP net income was $1.59 billion, up 8.9% from the previous year. quarter of the previous year. The company's non-GAAP EPS increased 10.6% year-on-year to $3.35.

High profitability

ADBE's trailing 12-month net profit margin of 29.29% is 534.3% higher than the industry average of 4.62%. Additionally, its gross profit margin of 87.87% over the last 12 months is 50.7% higher than the industry average of 73.40%. In addition, its 12-month ROE, ROC and ROA are 416.3%, 389.2% and 536.9% higher than the respective industry averages.

Impressive growth prospects

Street expects ADBE's revenue to grow 11.9% in the current year and 13.9% next year. The company's EPS is expected to grow 7.1% in the current quarter, 8.3% in the current year and 17.2% next year.

Additionally, ADBE's EPS is expected to grow at a CAGR of 14.2% over the next five years. Additionally, the company has an impressive track record of earnings surprises; it has exceeded consensus EPS estimates in each of the past four quarters.

Consensus Rating and Price Target Indicate Upside Potential

Of the 21 Wall Street analysts who have rated ADBE, 17 have rated it buy and four have rated it hold. The 12-month median price target of $458.67 indicates 17% upside potential. Price targets range from a low of $362.00 to a high of $550.00.

POWR ratings reflect strong outlook

ADBE has an overall rating of B, which equates to a buy in our proprietary POWR rating system. POWR ratings are calculated by considering 118 separate factors, with each factor weighted to an optimal degree.

Our proprietary scoring system also rates each stock against eight distinct categories. ADBE has an A rating for quality and a B for sentiment. ADBE's industry-leading profitability is consistent with its level of quality. In addition, year-over-year growth indicated by consensus earnings estimates justifies its Sentiment rating.

Of the 154 stocks in the Software - Applications sector rated F, ADBE is ranked #31.

Beyond what...