Adobe Systems (ADBE) stock vaulted to a new record high on Wednesday after third-quarter results showed the software maker made big progress in its move to the Internet cloud.
Adobe ended its fiscal Q3 with 1.03 million paid subscribers to its Creative Cloud business, an increase of 331,000 subscribers and up 47% over the fiscal Q2 total. Subscriber additions accelerated last quarter and handily beat analyst estimates.
"In terms of building up its cloud subscriber base, Adobe is hitting it out of the ballpark," IDC analyst Al Hilwa said. However, the transition from perpetual license software to subscriptions is hitting Adobe's revenue and earnings in the near term.
Late Tuesday, Adobe reported August quarter results that missed Wall Street's targets because of its faster-than-expected transition to a subscription-based business. The move to a cloud business model holds the promise of higher lifetime revenue per customer, as users switch to paying a monthly subscription fee rather than buying software products outright and using them indefinitely. But the company's top and bottom lines will take a short-term hit as customers stop paying for software upfront.
Adobe stock was up 7.7% to 51.83 in early afternoon trading on the stock market today. In the morning, Adobe shares hit a record high of 52.08.
Adobe could become one of the largest cloud vendors, says Pacific Crest Securities analyst Brendan Barnicle. In a research note Wednesday, Barnicle raised his 12-month price target on the stock to 60. He rates Adobe as "outperform."
"As Adobe continues its transition to the cloud, we can begin to see the possibility of Adobe generating as much or more cloud-based revenue than Salesforce.com (CRM)," he wrote. "Adobe is on its way to becoming one of the largest cloud vendors, in our view."
RBC Capital Markets analyst Robert Breza, in a note Wednesday, raised his price target on Adobe to 58 and reiterated his "outperform" rating.
"The trajectory of the transition to a recurring model seems to be progressing much more quickly than planned as Creative Cloud subscribers accelerated markedly to start (the second half of 2013)," Breza wrote. "We continue to like the stock as the transition occurs and look for an eventual flow-through to substantial margin expansion and cash flow generation, which we expect to occur over the next several years."
Adobe has two main businesses: its Creative Cloud, which includes products like Photoshop and Illustrator, and Marketing Cloud, which helps marketers manage and optimize their online advertising and promotional campaigns.
While uptake of Adobe's Creative Cloud has been impressive, investors should not ignore the company's Marketing Cloud business, Cowen analyst Peter Goldmacher said in a research note Wednesday.
"We remain amused that the bulk of the conversation with investors remains on the topic of the model shift (involving the creative software business), while the Marketing Cloud continues to be the fastest growing profitable SaaS (software-as-a-service) business in the market today," Goldmacher wrote. He rates Adobe as outperform with a price target of 54.