Adobe Systems Incorporated (ADBE): A Huge Upside in Creative Cloud

Salesforce.com, a dominant figure in cloud computing, is facing increasing competition from technology industry giants, such as Microsoft Corporation (NASDAQ:MSFT) and Apple Inc. (NASDAQ:AAPL), which have ventured into the cloud business. The company reported a loss of $67.7 million in its most recent quarter results compared to a loss of $19.5 million reported in FQ1 last year. The company also acquired Buddy Media for $745 million, last year, a Social Media Marketing software company, in a bid to boost revenues for its sales and marketing software.

Oracle, the king of database systems and very competitive in application servers business, reported a 0.9% decline in revenues year-over-year, while earnings increased by a marginal 0.2%. The company’s revenue of $9 billion for the quarter came short of the analyst estimate of $9.37 billion. Oracle reportedly blamed the new sales team for missing targets. However, Oracle remains very competitive in the application software business, thereby posing a notable threat to Adobe.

Valuation

Adobe Systems Incorporated (NASDAQ:ADBE)’s gross margins are the best, standing at 88% compared to Oracle’s 80% and Salesforce.com’s 77%. However, its operating and profit margins are easily trumped by Oracle, which has 39% and 28% margins, compared to the graphic design software giant’s 23% and 16% margins respectively. Salesforce.com posted an operating loss of 4%, while the net loss margin stands at 10%. (All figures are for the annualized last four fiscal quarters).

Oracle trades at about 15.87 earnings, while Adobe is pegged at a P/E of 32.28. Oracle’s PEG of 1.19 is the most impressive, compared to Adobe’s 3.03 and Salesforce.com’s 3.55.

The bottom line

Adobe Systems Incorporated (NASDAQ:ADBE)’s fundamentals may not be the most impressive, but in terms of outlook, there is so much to look forward to. Its focus on cloud-based products will certainly help the company cut on sales and support related costs. Additionally, the incremental revenue from its creative cloud software presents a huge upside for the company. With the possibility of generating as much as $1 billion in sales from this software by 2015, the company could begin growing revenue by double digits from 2014, thereby boosting earnings.

Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and Salesforce.com. The Motley Fool owns shares of Oracle. Nicholas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Adobe Systems: A Huge Upside in Creative Cloud originally appeared on Fool.com and is written by Nicholas Kitonyi.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.