Adobe Inc (NASDAQ:ADBE) is probably the most talked about stock in the Nasdaq today (at least until Netflix results hit the wires), and for good reason. The stock is flying after the company outlined its growth strategy and growth potential while providing guidance for 4Q18 and FY19 at its Adobe MAX event last night.
Shares are up just shy of double-digit percentage points in Tuesday’s action out of this influx of perspective from management. The guidance? Adobe reaffirmed its Q4 EPS outlook of $1.87 versus the $1.89 consensus on revenue of $2.42 bln versus the $2.43 bln consensus. Adobe also issued its first projections for FY19, forecasting revenue growth of 20%, equating to approximately $10.79 bln versus the $10.73 bln expectation.
Adobe Inc (NASDAQ:ADBE), perhaps most importantly, also noted that it sees the total addressable market expanding from $83 bln in 2020 to approx. $108 bln by 2021. In other words, it would appear as though the market had been pricing in a lower ceiling for total growth, rather than having any concerns about execution. Execution is great, the market is saying, but how much more grass is there out in the field to mow?
Lots, apparently. More than we thought, if management is to be understood as a reliable source. And, in this case, there’s no reason to see things otherwise. Tech stocks like to sandbag – they chronically lower the bar at moments like this. And this bar was just raised, which is a pretty good indicator of very real confidence from the team.
Where Does This Leave Things?
ADBE is coming off record-setting Q3 results on September 13 and a major $4.75 bln acquisition of Marketo, announced on September 20. In fact, the acquisition of this cloud software company focused on B2B marketing was the largest in ADBE’s history.
To really fan the flames, this newest guidance does not include any contributions from that acquisition, which is on schedule to close in Q4.
To put Marketo’s potential impact into perspective, last year the company generated revenue of $320 mln and is expecting growth of greater than 20% this year, with improving operating margins. Assuming Marketo does indeed generate top-line growth of 20%, that would drive FY19 revenue –significantly further still ahead of current consensus expectations, which do not seem to be including any contribution from Marketo next year.
In other words, Marketo pushes expectations even higher, both in terms of the financial impact of the deal and in terms of how we see the strategic and operational impact of integrating this new asset.
Strategically, it provides ADBE with a significant presence in the B2B marketing environment, especially in the mid-sized business market, expanding its total addressable market. Marketo’s software combines planning, engagement, and measurement capabilities into an integrated B2B marketing platform. The acquisition will also allow ADBE to better compete against companies like Salesforce, which also made a key acquisition in the B2B marketing space with its purchase of ExactTarget a few years ago.
On the topic of ADBE’s total addressable market, during its presentation last night the company said that it sees expansion from $83 bln in 2020 to $108 bln by 2021. In addition to the Marketo acquisition, a few other factors and trends are pushing Adobe’s TAM higher.
So, in short, the market is running ADBE shares higher today in a sprint for a long list of very good reasons, especially if the company has a good handle on analyzing how high the ceiling is.