Adobe Systems (NASDAQ:ADBE) climbed 30.2% in the first six months of 2019, according to data from S&P Global Market Intelligence, following a pair of record quarterly reports from the creative software specialist.
To be fair, the broader markets also enjoyed broad-based gains in the process -- including a more than 17% rise from S&P 500 -- but Adobe shined brighter than most as consumers continued to flock to its growing base of recurring cloud-based subscription products.
Adobe's rise so far this year has been gradual, even despite its record fiscal first-quarter 2019 report in mid-March that saw the company modestly increase its full-year earnings guidance. For that, CEO Shantanu Narayen described "continued momentum across Adobe Creative Cloud, Document Cloud, and Experience Cloud."
Shantanu was more direct when Adobe repeated the feat with an even better fiscal second-quarter report in June, crediting an "explosion of creativity across the globe" as well as Adobe's broad business transformation aimed at delivering more "engaging customer experiences."
More specifically, Adobe's revenue last quarter soared 25% year over year to $2.744 billion, translating to adjusted earnings of just over $900 million, or $1.83 per share. Both the top and bottom lines easily exceeded Adobe's guidance provided in March for earnings of $1.77 per share on revenue closer to $2.7 billion.
But perhaps most exciting was Adobe's successful shift to recurring revenue sources, which comprised around 91% of total sales during the quarter.
Adobe didn't update its full-year guidance last month, however -- though management was quick to point out they don't normally do so at this point in the year. But CFO John Murphy did tease that Adobe believes its first-half momentum should continue into the second half, "with typical seasonality in Q3 and strength in Q4."
In the end, that musing was more than enough to leave me satisfied that Adobe is likely to extend its winning streak going forward.
Microsoft (NASDAQ:MSFT) stock reigns supreme as America's sole trillion-dollar company a t $1,070 billion in market capitalization.
But I believe $1 trillion is only the beginning for Microsoft. Investment banker Cowen & Co. recently announced it is initiating coverage of Microsoft shares with an outperform rating and a $150 price target.
Just one thing explains Cowen's enthusiasm for Microsoft stock: growth. That's why Cowen believes Microsoft shares, already up 35% over the past 52 weeks, could be poised to rise even more in the years to come.
Sales at Microsoft are growing steadily, up 14% in 2018 and up another 14% year over year in Q1 2019. More important than the growth itself, however, is where it is happening. As Cowen explains, Microsoft has successfully "positioned itself in the right secular growth markets."
Specifically, it's positioned itself to grow in "productivity and business processes," the Microsoft unit housing its Office 365 commercial products, and in the "intelligent cloud," wherein lies Microsoft's Azure cloud computing business.
Over the past four years, productivity sales have grown 33% for Microsoft, and cloud sales are up 48%. That's as compared to only 10% total sales growth from 2014 to 2018 in Microsoft's better-known Windows business. Crucially, productivity and cloud are also Microsoft's two most profitable business units, boasting operating profit margin of nearly 36% each. Personal computing, by contrast (e.g., Windows), although still Microsoft's biggest business by revenue, earns only a 25% operating margin -- a respectable number to be sure, but nowhere near as profitable as productivity and cloud.
Thanks to Microsoft's success in growing in these two key areas, sales at the software giant topped $118 billion last year. But here's the real kicker: According to Cowen, continued growth in these businesses is likely to add another $100 billion in "incremental" high-margin sales to the company's top line between now and fiscal year 2025 which will result in 12% earnings growth.
Of course, the question all investors need to ask themselves is: Is this enough? Is 12% earnings growth fast enough to justify Microsoft's current valuation of 30 times earnings? In this case, I believe it is enough given their recent strategic success.