Will Q3 earnings lift the Adobe stock price higher?

The Adobe [ADBE] stock price has gone from strength to strength recently. Shares in the software company hit a new all-time high earlier this month when it reached $673.88 during intraday trading on 3 September before closing 33.3% up in the year-to-date at $666.59.

Such a rise in performance may have come as a surprise for investors as the Adobe stock price had waned for the first few months of the year, sitting predominantly in the red and being down as far as 15.8% year-to-date when it closed at $421.20 on 8 March.

Following its March slump, the Adobe stock price went on to rebound through to early April, putting it in the green for the first time this year (excluding 16 February, when it closed 0.3% up year to date). The bounce back saw the stock rise to $525.08 on 16 April, up 24.6% from its 2021 low and up 4.9% in the year to date.

Although the Adobe stock price temporarily fell back into the red for most of May and the beginning of June, the stock rallied again and has been following an upward trend ever since.

In fact, it was in June that Adobe began to outpace the performance of the Invesco QQQ ETF [QQQ], which tracks the top 100 companies listed on the Nasdaq and allocates 2.05% of its portfolio to Adobe stock. While the fund, Nasdaq index and Adobe have followed similar trends over the year, Adobe had underperformed during the first six months of 2021 but has outpaced both since then.

The Adobe stock price was up 32.2% year-to-date (through 15 September), whereas the Invesco QQQ ETF and Nasdaq were up 20.5% and 17.6%, respectively. As Adobe prepares to release its third-quarter earnings release on 21 September, how will the results influence the stock?

How has the Adobe stock been performing?

When Adobe released its second-quarter results on 17 June, it reported non-GAAP earnings of $3.03 per share, which surpassed the Zacks consensus estimate of $2.81, marking a 7.83% surprise. This figure represented an increase of 23.67% year-on-year and was also the fourth consecutive quarter where Adobe beat earnings estimates.

For the quarter ended 4 June, Adobe posted revenue of $3.84bn, beating the Zacks consensus estimate of $3.72bn by 3.23% and up 23% year-on-year.

“Adobe had an outstanding second quarter as Creative Cloud, Document Cloud, and Experience Cloud continues to transform work, learn and play in a digital-first world,” Shantanu Narayen, Adobe’s president and CEO, said.

“Adobe had an outstanding second quarter as Creative Cloud, Document Cloud, and Experience Cloud continues to transform work, learn and play in a digital-first world” - Shantanu Narayen, Adobe’s president & CEO

“Our innovative product roadmap and unparalleled leadership in creativity, digital documents, and customer experience management position us for continued success in 2021 and beyond.”

While the Adobe stock price was already following a positive trend in the run-up to its second quarter earnings, the stock pushed even higher following the results. Since the second quarter report, the Adobe stock price has gained 20.6% and is yet to fall below its 17 June close of $551.36.

Riding the ecommerce wave to profits

Looking ahead to the upcoming earnings report, Zacks is anticipating Adobe to announce quarterly earnings of $3 per share, which would represent a growth of 16.7% from a year ago. Revenues, on the other hand, are pegged at $3.88bn for the quarter, up 20.3% year-on-year.

For the full year, Adobe’s earnings are expected to reach $12.21 per share, while analysts expect revenues to reach $15.65bn. These figures would represent respective growths of 20.89% and 21.64% year-over-year.

“Despite a $308bn market capitalisation, management believes it has plenty of growth ahead. It pegs the combined addressable market at $147bn — more than ten times its trailing 12-months sales,” Jason Hawthorne wrote in The Motley Fool.

“In a world that is increasingly online, Adobe is perfectly positioned. Investors should ride the wave of ecommerce and digitisation to profits and stock gains in the years ahead.”

“In a world that is increasingly online, Adobe is perfectly positioned. Investors should ride the wave of ecommerce and digitisation to profits and stock gains in the years ahead” - Jason Hawthorne

This bullish outlook is shared by analysts as well, including Keith Weiss at Morgan Stanley, who recently raised his price target on Adobe from $610 to $736 while maintaining an overweight rating on the stock, reports The Fly. Weiss stated that he sees "an opportunity for a better-than-expected Q3 print."

This aligns with the general outlook among 27 analysts polled by CNN Money that have given Adobe a consensus buy rating, led by a majority of 20. There are, however, two analysts that rate the stock as outperform, while four have given it a hold rating. A single odd bear out has rated the stock as underperform. 

Meanwhile, the median 12-month price target among 22 analysts polled by CNN Money is $657.50, with a high estimate of $750 and a low of $550. Despite the bullish ratings, the median price represents a 1.14% decrease from Adobe’s 16 September closing price.