Long Google, Short Adobe

Includes: ADBE, GOOG
by: Intelligent Speculator

Before discussing this new trade, I’d like to congratulate all those who have been short Research in Motion (RIMM) in the past few months but even more in the last few days. I’ve discussed the company over and over, often calling it a failed company and while I did contemplate some scenarios where the stock could rebound, even in those posts I remained extremely skeptical that it could actually happen. However, like many others, I did not pull the trigger and did not short RIMM even though I had ample opportunities to do it. I have no regrets as I did consider it risky but I have to congratulate those who did, it has been a very profitable trade.

Last week, we were able to close out a trade on Google and AOL that did not turn out very well but did at least give us the opportunity to open a new trade. Again, I found it difficult to find amazing opportunities out there because there are still quite a few stocks that I’m having a difficult time judging such as Netflix (NASDAQ:NFLX). Today, we decided to open a new trade on two stocks that have similar P/E ratios but in my opinion, one stock has a much better outlook. It’s one of many different ways that I use to find good trading opportunities and while the two have had similar growth in recent months, I would expect Google (NASDAQ:GOOG) to outperform Adobe (NASDAQ:ADBE) over the medium to long term.

Before going further, let’s look at the numbers of the two companies that are being traded today:

Ticker Name Price EPS PE Ratio PE Next Year Return YTD Sales Growth Analyst rating Book Value
ADBE Adobe Systems Inc 30.47 1.49 18.67 12.09 0.06 28.99 3.81 10.74
GOOG Google Inc 485.02 26.69 19.43 12.56 (15.76) 23.98 4.7 151.65

Long Google

Google has had a rather rocky ride since being turned over to Larry Page as its CEO and while it is still making a lot of money, most of it is stuck offshore. Contrary to what many seem to believe, I do think that Google still has a lot of growth left through its leader position in mobile, its display advertising, and its leader position in the cloud computing. I think Google’s new more aggressive approach will pay off. I have been wrong about Google in the past though so hopefully I’m not blinded by the company.

Short Adobe

Adobe is a company that has a few very solid products that generate cash flow and it's a company that has been recently known mostly because of its war with Apple (NASDAQ:AAPL) about flash. It is losing that war slowly but surely as companies continue to move increasingly towards HTML5… but that is a very small part of Adobe’s future and certainly not the reason why I am shorting Adobe. That being said, I doubt the company will be able to keep up with Google and given the choice between the 2 at similar valuations (P/E), I would go with Google any time.

Disclosure: No positions on Google or Adobe.