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Let's hear it from the experts first.

According to the Gartner Report, "Adobe has been dynamically evolving its strategy and products during the past three years. Cloud-based services are at the center of its two major, complementary corporate initiatives: Digital Media and Digital Marketing. Their aim is to enable customers to make, manage, measure and monetize static and interactive content across all devices. With the Creative Suite as the very strong center of its Digital Media imperative and a very strong approach to its Digital Marketing initiative, Adobe is well positioned for the future. Its biggest risks lie in effectuating the transitions and effectively communicating and executing its plans."

With more focus toward digital media and digital marketing, Adobe Systems (NASDAQ:ADBE) might become a direct competitor with Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Adobe's Creative Cloud doesn't seem to be in danger from any big firm at the moment. When it comes to Adobe's Digital Marketing Suite and Digital Publishing Suite, it can become a face-off with IBM, who is in the same digital marketing niche with its Smarter Planet campaign including Smarter Commerce initiative and Customer Experience Suite.

It must be understandable that these industry stalwarts have already had a head start, and Adobe, the late bloomer, might face an impediment while shifting to the more business-oriented, subscription-based, cloud services business model. Remember, Adobe's revenue is derived primarily from the licensing of software products, associated software maintenance and support plans, custom software development, non-software related hosting services, consulting services, training, and technical support. Adobe has to leverage the strategic acquisitions (Omniture Inc. in 2009, Day Software in 2010 and Efficient Frontier in 2012), broader channel coverage and business-oriented marketing approach to have a smooth and successful transition.

Well, everything sounds good when you have money in your pocket. How is Adobe doing financially?

Digging Deeper into the Company Financials

To start with, the acquisitions of Day Software and Omniture resulted in about 23% increase in revenue from Enterprise (which also includes LiveCycle) and in 2011, over that in 2010. It must be noted that the printing and publishing segmented revenue decreased 3% in 2011 compared to 2010 due to lower Shockwave revenue and bad timing of ColdFusion product releases.

It must be noted that product-categorized revenue still accounted for 83% of Adobe's total revenues. In addition to that, the cost of revenue increased in the subscription, services and support segments due to the acquisitions of Day Software and Omniture, accompanied with surge in overheads. If Adobe doesn't transition fast, the increasing costs in these segments might offset the income gained from the product-based operations.

Total revenue increased to $4.2 billion in 2011, compared to $3.8 billion in 2010, with the basic net income per share rising to $1.67 per share in 2011 from $1.49 per share in 2010, and diluted net income per share rising to $1.65 per share in 2011 over $1.47 per share in 2010. With significant increase in the cash assets along with accrued expenses and deferred revenues, the company seems to be doing a fine job with garnering working capital for the transition.

Total stockholder's equity increased by $590 million, even after the stock repurchase worth $695 million. On a second thought, it is wiser not to look at return on equity metric as of now, but the increase in revenue does give us a positive signal.

What about the third quarter results this year?

Adobe achieved revenue in Q3 2012 of $1.081 billion, within its targeted range of $1.075-1.125 billion. With faster adoption of Creative Cloud, subscriptions during the third quarter effectively transitioned approximately $29 million more perpetual revenue than expected to Creative Cloud. Ah! Talk about transition and it's already happening it seems.

According to the press release, "Adobe Creative Cloud paid subscriptions grew to approximately 200,000 in the third quarter. Adobe added approximately 8,000 Creative Cloud subscriptions per week during the quarter, exceeding the addition of 5,000 subscriptions per week that was assumed in its third quarter financial targets."

Operating income was $278.3 million and net income was $201.4 million on a GAAP-basis. Operating income was $391.8 million and net income was $291.2 million on a non-GAAP basis.

Even the Digital Marketing Suite achieved record quarterly revenue with 40% YoY growth.

Around 125,000 new Creative Cloud subscriptions in the next fourth quarter, which represents approximately $94 million, will probably shift from the perpetual product section to the subscription section, according to the management outlook.

Although Adobe seems to be performing well at the moment, with the operating margin lingering around 26% in comparison to Microsoft's (NASDAQ:MSFT) 29.92%, Oracle's (NYSE:ORCL) 36.92%, Apple's 31.22% and IBM's (NYSE:IBM) 19.64%, I will still say that Adobe might have to go through tough time transitioning. Needless to say, the operating margin might tank for some time ahead. Remember, Adobe's current return on average assets, which certainly includes the newest acquisitions, stands at 9.72%, which is much lower than that of the above mentioned companies. So evidently, the company needs to figure out how to capitalize on the newly gained assets.

But you definitely cannot reject Adobe's presence altogether, to be honest.

Okay, what about the price - overpriced or underpriced?

Take a look at the graph below.


(Click to enlarge)

The MACD curve is quite below the signal line and lower high's does signal an upcoming downward trend, which is further confirmed the RSI signal of over 50 (at the time of writing this article).

In the candlesticks, the presence of doji in the recent trading session, along with the longer downward shadows, show strong selling pressure, might move the stock price down. In fact, the stock price is already testing the resistance of the lower Bollinger band.

So, in support of these evidences, along with the fact that Adobe is trading at PE ratio of 21.26, compared to the average of 15 (of the above mentioned companies), the stock price might go down in the coming few weeks.

Alpha Conclusion

For my alpha readers, it is always better to be safe than sorry. You might want to wait a few weeks before you think of investing in the stock. It might turn out to be more profitable in course of time.

Source: Adobe Needs Some More Time, It's As Simple As That