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Topic: Growth Stocks

ADOBE SYSTEMS INC. $73 – Nasdaq symbol ADBE

ADOBE SYSTEMS INC. $73 (Nasdaq symbol ADBE; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 498.7 million; Market cap: $36.4 billion; Price-to-sales ratio: 8.9; No dividends paid since June 2005; TSINetwork Rating: Average; www.adobe.com) makes software for publishing companies and website developers.

Its main products include Adobe Acrobat, which lets users create and edit electronic documents in the widely used PDF format, and its Creative Suite package of photo editing (Photoshop) and desktop publishing programs.

In 2012, Adobe started selling its Creative Suite software as a cloud-based service called Creative Cloud. Users pay a monthly subscription fee that lets them access the software and store documents online. That gives Adobe more predictable revenue streams than selling its products as a one-time purchase.

Demand for Creative Cloud has been stronger than the company anticipated: it now gets 63% of its revenue from recurring subscriptions. The shift to a subscription model also means Adobe is losing less revenue to software piracy.

The shift has hurt Adobe’s short-term earnings growth: its profits will probably fall from a peak of $2.35 a share in fiscal 2012 to $1.20 in fiscal 2014 (fiscal years end November 30). But the subscription approach enhances the company’s long-term prospects. That’s the main reason why the stock has more than doubled in the past two years. It now trades at 60.8 times the 2014 earnings estimate.

The company spends a high 21% of its revenue on research, so it’s more profitable than it seems. But even so, that’s a high p/e ratio for a firm whose clients are mainly in cyclical businesses like publishing.

Adobe is still a hold.

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