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Should You Follow Bullish Analysts Into Adobe Stock?

It's been a fantastic year for Adobe (NASDAQ: ADBE) shareholders. Considering its stock is up 75% in 2017, it would be logical to assume concerns regarding Adobe's relative value may give bullish analysts reason for rethinking their positive stance. As it turns out, nothing could be further from the truth.

There are currently 32 analysts that follow Adobe and none has a sell or the equivalent negative sentiment of an underweight rating on its stock. In fact, a mere eight rate Adobe a hold, with the balance all suggesting it's still a strong buy. The nearly across-the-board good tidings beg the question: Are they warranted?

Image source: Adobe.

First, the good news

Seemingly every quarter brings with it another record-breaking total revenue result, and last quarter was no exception. Adobe's $1.84 billion in sales was a 26% increase over a year ago and its per-share earnings of $0.84 was a mind-boggling 56% rise over last year's $0.54 a share.

Adobe's subscription sales, which drives its all-important annual recurring revenue (ARR), soared 34% to $1.57 billion. When servicing and support revenue of $111.7 million is added into the ARR mix the combined $1.68 billion means an astounding 91% of Adobe's revenue is derived from existing customers. Is it any wonder analysts are smitten with Adobe?

Better still, exiting last quarter Adobe's ARR for the trailing 12 months was an eye-popping $4.87 billion. In other words, assuming Adobe didn't lose or gain any customers in the next year and factoring in service and support revenue, it would still report about $5 billion in sales.

Virtually every one of Adobe's cloud segments are providing tremendous growth. And with so much emphasis on recurring revenue, something CEO Shantanu Narayen has been laser-focused for the last several years, expenses remain well managed.

Image source: Adobe.

Now for the really good news

With so many positives, where does Adobe go from here? A recently expanded partnership with Microsoft (NASDAQ: MSFT) and updated guidance for fiscal 2018 demonstrate that as impressive as Adobe stock has performed, it's just getting warmed up.

Adobe and Microsoft are no strangers and their joint initiatives, which began in 2016, are continually growing and include e-signature capabilities for the former's document cloud. The two industry leaders also teamed up earlier this year to explore incorporating Microsoft's augmented reality (AR) solution into Adobe's design software suite.

Earlier this month Adobe announced its marketing cloud, a component of its experience cloud, will be integrated with Microsoft's fast-growing CRM solution, Dynamics 365. The plan is to utilize data from Dynamics 365 to "deliver one-to-one personalization of web content at massive scale." Partnerships like Microsoft along with its sizable ARR growth are a couple of reasons why Narayen is expecting big things in 2018.

Picking up speed

Adobe will wrap up its fiscal 2017 with its earnings news tentatively scheduled for Dec. 14. And if Adobe's recently updated expectations for 2018 are any indication, investors will be treated to another outstanding quarter.

A few weeks ago at its annual MAX conference in Las Vegas, NV. Narayen got the party off to a running start with a forecast for 2018 that would certainly keep Adobe's positive momentum going. Adobe now expects total annual revenue of $8.7 billion next year, equal to a 20% rise in sales. Excluding one-time items, Adobe has forecast $5.50 a share in 2018, equal to a 31% gain compared to the trailing 12 months.

For investors like myself that appreciate actual profits including extraordinary costs, Adobe's forecast is for a stellar $4.40 per-share in 2018. Perhaps most impressive is Adobe's assertion that it will generate a whopping $1 billion in additional annual recurring revenue, bringing its running tally to about $6 billion.

Should you follow bullish analysts into this stock? Absolutely: This time the pundits got it right.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Tim Brugger has no position in any of the stocks mentioned. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.