Analyst: Buy The Adobe Dip, Despite Q3 Bookings 'Blip'

Adobe Systems Incorporated (NASDAQ: ADBE) reported fiscal third quarter earnings, which may have fallen short of investor expectations based on the stock's 2.7 percent decline.

Nevertheless, Adobe's earnings report includes many positive readouts that reinforces the case to owning the stock, at least according to analysts at KeyBanc Capital Markets. Analyst Brent Bracelin maintains an Overweight rating on Adobe's stock with an unchanged $174 price target.

Adobe reported a "strong" revenue growth rate of 26 percent with strength seen in its different segments, Bracelin commented in his report. Overall revenue of $1.841 billion exceeded the consensus estimate of $1.818 billion, while operating margin expanded at the fastest pace over the past year at 449 basis points.

However, investors seem to be concerned with Adobe's increasing mix of larger deals within the Experience Cloud segment. Coupled with elongating sales cycles the company did report a "slight shortfall" in third quarter subscription bookings which also came in below the company's own expectations. As a result, the company does expect a 24 percent overall growth rate for fiscal 2017 but this is below the prior outlook of 25 percent growth.

Nevertheless, Adobe's earnings report does show "impressive growth," especially for a company that's close to achieving an $8 billion revenue run-rate with a 38 percent operating margin. As such, the stock should be viewed as a core holding within the overall large-cap universe, especially if the stock pulls back in reaction to its earnings report.

The analyst's $174 price target implies an EV/FCF multiple of 24x on 2018 estimates of $6.85 while a bull-case scenario implies a $204 per share valuation if free cash flow expands above $7 per share.

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