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Adobe's stock to reach $110 in medium term

I remain upbeat about the shares of Adobe Systems, a diversified software company. Recently, the company posted solid financials for its fiscal 2016 second quarter. Revenues increased 20.4% y-o-y to $1.40 bn and surpassed consensus estimate of $1.39 bn. Subscription comprised 57% of Adobe’s total first-quarter revenues, up 40% from the year-ago period. Products declined 28.4% and contributed 14% to revenues, while Services & Support, up 4.3%, brought in the rest. Revenues from Digital Media Solutions jumped 26% to $943 mn, with Creative Cloud and Document Cloud remaining the two major contributors within the segment. Digital Media annualized recurring revenues were $3.41 bn at the end of the quarter and are forecast to reach about $4 bn by the end of the fiscal year. Adjusted operating margin was 26.9%, up 679 basis points, and adjusted earnings per share came in at 71 cents beating analysts’ average projection of 68 cents. For the fiscal third quarter, Adobe expects non-GAAP EPS in the range of 69-75 cents on revenues of $1.42-1.47 bn.

Adobe ended FQ2 with cash and investments balance of $4.32 bn against $4.10 bn in the previous quarter. In the reported quarter, cash generated from operations was $488.7 mn and capital expenditure was $53.8 mn. Additionally, the company repurchased approximately 2.2 mn shares for $205 mn.

I positively value Adobe’s market position, compelling product lines (including Creative Suite cloud initiative and digital media products), continued innovation and strong balance sheet. After its successful transition from traditional license to subscription-based services, Adobe now wants to make a place in cloud-related software in areas like documents and marketing. In this regard, the company has been introducing significant features and a number of updates to its Document Cloud. The consistent adoption of the Adobe marketing cloud could serve as a potential catalyst going forward.

Adobe’s shares are trading above $92.5 support level as well as 50-day moving average. I'd buy on breaking $100 resistance level, with medium-term target at $110.