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Will Stiff Competition Hit Adobe Systems’ (ADBE) Q3 Earnings? (Revised)


Adobe Systems Inc. ADBE is slated to report third-quarter fiscal 2017 results on Sep 19. Last quarter, the company delivered a positive earnings surprise of 8.51%.

The surprise history has been good in Adobe’s case. The company surpassed estimates in each of the trailing four quarters, with an average surprise of 6.35%.

The company’s shares have charted a solid trajectory in recent times, increasing more than 50.5% year to date, outperforming the industry’s gain of 27.2%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Adobe is being driven by continuous innovation in the Creative Cloud and Marketing Cloud business lines.

The Creative business under the Digital Media Solutions segment has witnessed acceleration in Creative Cloud subscriptions. Also, the conversion of enterprise customers to Enterprise Term License Agreements (ETLAs) is resulting in higher adoption of its enterprise Creative Cloud offering.

Increased subscription as well as ETLA and digital publishing suite adoption should drive Creative Cloud’s annualized recurring revenues. Moreover, Adobe’s increasing market share in the artificial intelligence (AI) space will also expedite its top-line growth. The company is extending its digital marketing offerings to the auto market to drive the next phase of revenue growth.

We are also optimistic about Adobe’s market position, compelling product lines and balance sheet strength. Additionally, continued adoption of the Adobe marketing cloud could serve as a catalyst in the to-be-reported quarter.

However, Adobe’s increased investments made on new cutting-edge technologies including AI and virtual reality (VR) features could hurt its performance.

Also, lower end-market demand, increasing competition from Microsoft and Apple, and significant exposure to European region could be matters of concern.

Earnings Whispers

Our proven model does not conclusively show that Adobe is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Most Accurate estimate stands at $1.02 and the Zacks Consensus Estimate is pegged at $1.00. Hence, the difference is +1.04%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: However, Adobe has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Del Taco Restaurants, Inc. TACO, with an Earnings ESP of +3.85% and a Zacks Rank #2.

Cathay General Bancorp CATY, with an Earnings ESP of +2.52% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

International Business Machines Corporation IBM, with an Earnings ESP of +0.46% and a Zacks Rank #3.

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(We are reissuing this article to correct a mistake. The original article, issued on Sep 14, should no longer be relied upon.)

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