Will Adobe Continue Its Ascent?

With shares of Adobe Systems Inc. (NASDAQ:ADBE) trading at around $45.23, is ADBE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Adobe has been a winner because of its continuous innovation. For example, one of its newest projects is Adobe Primetime. As Adobe puts it, Adobe Primetime offers one platform for publishing ads and analytics. The following is a more detailed description. It comes from Adobe’s website: “Adobe® Primetime lets content programmers and distributors profit from video on every connected screen. It eliminates the complexity of reaching, monetizing, and activating global audiences across devices by providing a modular platform for video publishing, advertising, and analytics. The results? Greater revenue from ad sales and subscriptions, lower operating costs, and audiences that are more engaged.”

Adobe management is also optimistic about Creative Cloud’s potential. There have been 153,000 new Creative Cloud paid subscriptions added, and management expects 1.25 million paid Creative Cloud subscriptions by the end of the year. This will be accomplished through marketing programs, trial downloads, and free memberships.

Adobe’s Q1 revenue was down year-over-year, but ahead of expectations. Products were down 16.4 percent year-over-year, Subscriptions were up 53.4 percent sequentially, and Services and Support were up 19.1 percent year-over-year. One of the biggest headwinds for Adobe right now is an increase in operating expenses, which have increased 15.8 percent to $639.40 million year-over-year. For Q2, Adobe expects revenue between $975 million and $1.025 billion.

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The chart below compares basic fundamentals for Adobe, Autodesk (NASDAQ:ADSK), and PTC Inc. (NASDAQ:PMTC). These three companies differ in size. Adobe has a market cap of $22.72 billion, Autodesk has a market cap of $8.85 billion, and PTC has a market cap of $2.89 billion.

ADBE

ADSK

PMTC

Trailing   P/E

31.92

36.92

N/A

Forward   P/E

25.43

16.06

11.85

Profit   Margin

16.32%

10.70%

-1.73%

ROE

11.14%

12.60%

-2.59%

Operating   Cash Flow

$1.51 Billion

$559.10 Million

$195.13 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

2.30%

1.40%

4.70%

 

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Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Stong       

The debt-to-equity ratio for Adobe is slightly stronger than the industry average of 0.30.

Debt-To-Equity

Cash

Long-Term Debt

ADBE

0.23

$3.66 Billion

$1.53 Billion

ADSK

0.36

$1.95 Billion

$745.60 Million

PMTC

0.45

$248.39 Million

$368.12 Million

 

T = Technicals on the Stock Chart Are Strong   

Adobe has outperformed Autodesk and PTC by wide margins over the past year.

1 Month

Year-To-Date

1 Year

3 Year

ADBE

8.46%

19.45%

38.03%

26.90%

ADSK

-1.54%

11.88%

0.28%

27.05%

PTC

-6.41%

6.64%

18.78%

22.85%

 

At $45.23, Adobe is trading above all its simple moving averages.

50-Day   SMA

40.44

100-Day   SMA

38.27

200-Day   SMA

35.30

 

E = Earnings Have Been Steady                     

Revenue has consistently improved on an annual basis, but the rate of growth has slowed. The same story has played out for earnings.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

3.58

2.95

3.80

4.22

4.40

Diluted   EPS ($)

1.59

0.73

1.47

1.65

1.66

 

When we look at the last quarter on a year-over-year basis, we see declines in revenue and earnings. The same can be said on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

1.05

1.12

1.08

1.15

1.01

Diluted   EPS ($)

0.37

0.45

0.40

0.44

0.13

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Trends have supported the industry for several years. However, there is a lot of exposure to Europe, which has been extremely weak. On the other hand, it hasn’t seemed to have a major impact on results.

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Conclusion

Adobe’s new projects will lead to some growing pains, but these projects should also lead to increased revenue growth down the road. Adobe is also one of the strongest players in Application Software, which is a big plus. The bad news is that the stock was hammered during the financial crisis of 2008/2009. Therefore, if a similar environment were to present itself in the future, Adobe wouldn’t be a safe place to hide.

If the economy holds up, then Adobe is likely to remain a winner. This is a company with a ton of innovation, quality management, and a strong balance sheet. Barring a stock market collapse, Adobe is an OUTPERFORM. For those worried about the stock market being overvalued, this is not a good defensive option.

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