Adobe Systems Inc. Stock: A Bargain Despite Recent Gains

Ahead of fiscal 2016 third-quarter earnings announced on Sept. 20, Adobe (NASDAQ: ADBE) stock was sitting at $99.68 a share, well below consensus analyst estimates of $125 a share at the time. After the company reported another blowout quarter, by the close of Oct. 3 trading, Adobe shareholders were enjoying a gain of nearly 9%, with the stock closing Oct. 3 at $108.45.

But Adobe's stellar run may be concerning to investors wondering if they've missed the boat. Not to mention the blase analysts who've actually lowered Adobe's price target to just $118.46 since last quarter's results were announced. But brush those concerns aside. For a number of reasons, Adobe remains a great long-term "buy."

Image source: Adobe.

What's not to love?

Adobe's $1.46 billion in sales last quarter was its 10threcord result in a row, and good for a 20% improvement compared to the year-ago period. Just as impressively, Adobe was able to report sky-high gains in earnings per share thanks to CEO Shantanu Narayen's expense-management efforts.

Adobe reported a whopping 59% jump in GAAP (including one-time items) per-share earnings of $0.54, well above last year's "paltry" $0.34 EPS and higher than analyst estimates. Despite Adobe's 20% revenue increase and strong EPS results, it didn't require emptying the expense coffers to make it happen.

Operating expenses increased by 14% year over year, and Adobe's cost of revenue inched up 6%. Considering its top-line growth, Adobe's spending last quarter was more than reasonable. Keeping a grip on expenses also drove a 50% increase in operating income, yet another Adobe quarterly record, and helped push its cash and equivalents on hand to $4.45 billion, up from last year's $3.99 billion.

Revenue growth, EPS gains, and maintaining its ongoing string of record quarters -- all without the need to spend through the roof -- form a good recipe for long-term growth and provide a sound explanation as to why Adobe stock is still a bargain. And it gets better.

Now for the best part

When investors look back years from now, Adobe's decision to strictly adhere to its subscription-based business model could stand out as its defining moment. Design software peerAutodesk (NASDAQ: ADSK) serves as a good example of how critical it will become to build a base of recurring revenue, rather than rely solely on product sales, with each successive quarter.

Though Autodesk's $551 million in revenue last quarter was a 10% year-over-year decline, its stock has climbed nearly 13% since the company shared its fiscal 2017 second-quarter results on Aug. 25. Why? Because Autodesk is making significant progress on its "business model transition," which is CEO-speak for shifting to a subscription-based, annual recurring revenue (ARR) focus. And as Adobe knows firsthand, ARR is an ideal methodology for sustainable long-term growth, and investors are beginning to recognize it.

Adobe's shift to its document, creative, and marketing clouds has helped facilitate its recurring revenue transformation because the more services and data it stores and helps its customers utilize, the less likely they'll forgo their ongoing subscriptions. Last quarter speaks to the success of Adobe's ARR model -- an objective Autodesk is working to emulate going forward.

Narayen cited total digital media ARR of $3.7 billion last quarter, up 8% sequentially. That kind of growth would be significant even on a year-over-year basis, but as it is occurring from one quarter to the next, it's no wonder Adobe's guidance is for yet another revenue record as it winds up its fiscal year.

As with Autodesk, Adobe's design software and services are ideal for the up-and-coming virtual reality (VR) and 3D markets, and the company has the new opportunities covered. Adobe isn't new to either medium, but its VR and 3D content design upgrade released last month take its cutting-edge design solutions to a whole new level.

Not only is Adobe hitting on all cylinders today, but there's no end in sight for its soaring recurring revenue, its customers love its cloud features, spending remains under wraps, and its offerings are perfect for the burgeoning VR and 3D industries. When all is added up, Adobe is still a bargain.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.