Background

At their website (www.adobe.com), you'll see solutions for digital imaging, print publishing, video and audio, and web publishing and conferencing. You see products like Acrobat, Creative Suite, Flash, Cold Fusion, Dreamweaver, Illustrator and Photoshop.

Trend

Interpersonal and mass communications have moved to video. And, Adobe is a leader in video software -- for both video professionals and consumers.

Flash® Video, which powers online TV shows YouTube (just bought by Google) and MySpace, is driving Adobe's video business. On Oct 18, that part of the business was strengthened by the acquisition of Serious Magic Inc, a maker of video software and communications tools for general business users and casual bloggers.

As digital communications become ubiquitous in the broadcast market, over the web or on mobile devices, somebody has to pay the piper. Mass media must be delivered by companies that have a business model tied to advertising. Google will now use YouTube to become the leading on-line clearing house for video ads, and Adobe video products and Flash Video are the major facilitator.

Unfair advantage

In a word, the company excels at delivering the best products and solutions for all media, particularly dynamic media where the future lies. Adobe video products and Flash Video are creating new ways to integrate the moving image into almost every imaginable communication project. This is a direct quote by the CEO at Serious Magic, which was acquired this week by Adobe.

The company is one of the Cara Global Best 100 Companies based on management, intellectual property, and financial strength and operating metrics like return on equity and margins. The Creative Solutions (Creative Suite/Macromedia Studio) segment will resume its super-growth after the Creative Suite 3 launch in May-2007. The Acrobat 8.0 product will start shipping next week, which means that the Knowledge Worker segment of the business will see accelerating revenues.

Opinion on the stock

The stock has moved from $26 to $38.50 since late July. That's a +48-pct gain in less than 12 weeks, which is not sustainable. On Sept 15 (with ADBE at $33.65), Merrill Lynch and UBS re-issued Buy ratings with 12-month Price Targets of $40 and $48 respectively.

I'd be prepared to pay 28 times next years earnings estimate, which I'll say is $1.36/share [$1.42/share (Merrill Lynch) and $1.29 (UBS)]. That's a price objective of $38, which is where the stock is today. So, my opinion is the stock is fully priced.

From a personal view of the broad market at this point, I believe we are headed down by some 25 pct over the next three to four months. Today (Oct. 19) nineteen years ago (1987), the Dow 30 index of blue chip stocks dropped -23 pct in a single day. Anything is possible. Today (2006), I see similar unwarranted enthusiasm by the sell side that has driven many Dow stocks to extreme over-bought levels, so I have gone to cash.

Although I think highly of Adobe the company, and even acknowledge that ADBE the stock is not extremely over-bought, I would not be a buyer here. I think we'll see an entry position of $26 again.

Adobe Systems Inc [GICS 45, Cara 100]
(ADBE: Yahoo Finance file)
(ADBE: StockChart chart)
(ADBE: Investertech chart)
(ADBE: ADVFN Financial Data)
(ADBE: ADVFN Financial Data)

Download UBS Sept 15 report on ADBE
Download ML Sept 15 report on ADBE
Download S&P Jun 20 report on ADBE
Download Argus Aug 20 report on ADBE

Howard Lindzon/Wallstrip focuses on Adobe today. You can access the show via the window on the right sidebar.