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Why Adobe Inc. Stock Climbed 29% in 2018

What happened

Shares of Adobe Inc. (NASDAQ: ADBE) gained 29.1% in 2018, according to data from S&P Global Market Intelligence. The company's recurring revenue model helped power strong sales and earnings gains and drove shares to handily outperform the market last year.

^SPX data by YCharts

Moving market-leading design software like Photoshop and Illustrator to a subscription-based distribution model has yielded great results for Adobe; growth in international markets and pushes into e-commerce and enterprise services are helping to drive strong performance and expand the company's ecosystem.

Image source: Getty Images.

So what

Adobe shares climbed gradually across 2018 but retraced some gains following the company's fourth-quarter earnings release and guidance in mid-December. Management's earnings target fell short of analyst expectations, but the year-end sell-offs also occurred amid dramatic market declines and likely reflected an increasingly cautious mood among investors. Even with substantial sell-offs to close out the year, Adobe shareholders still had plenty to be happy about with the company's 2018 performance.

Adobe's transition from one-time sales to a software-as-a-service model has been hugely successful, and its acquisition of cloud marketing software firm Marketo and e-commerce platform Magento could help power its next growth stages. Adobe continued to record strong sales growth across 2018; it has now reported comparable sales growth for 15 quarters straight and sales growth of at least 20% for 14 consecutive quarters.

Now what

For fiscal 2019, Adobe expects adjusted earnings per share of $7.75 on sales of $11.15 billion. Shares trade at roughly 30 times the year's expected earnings and 10 times expected sales. That's a growth-dependent valuation that will require that the company continue to execute at a high level. However, the business is showing undeniable momentum, and Adobe's leading position in design software, combined with its heightened push into marketing, enterprise services, and e-commerce, gives the business paths to exceeding expectations.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Adobe Systems. The Motley Fool has a disclosure policy.

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