Adobe Systems Incorporated (NASDAQ:ADBE) got a nice 5.5% pop in its stock last week, even after reporting fiscal 2Q EPS that fell 66% year-over-year. Although earnings were down due to weak product sales and rising operating expenses, the software company managed to beat consensus by 5% and reiterated positive news on its move from packaged software to the cloud.
As a result, the digital-media segment saw revenue down 17.5% as users shifted to subscriptions from perpetual licenses. The move to a subscription base does have its downside. Adobe Systems Incorporated (NASDAQ:ADBE) will now be collecting revenue over a period (i.e. monthly) versus a lump sum.
Following 2Q results, analysts lowered their fiscal 2014 EPS by $0.04, from $1.75 to $1.71. With the transition, it doesn’t appear that Adobe Systems Incorporated (NASDAQ:ADBE) should trade at a premium valuation to the industry, which it currently trades at.
Adobe might not be the best of investments following the run up in the stock price; let’s have a look at some investment ideas for gaining access to the popular tech software sector.
Virtualization
Citrix Systems, Inc. (NASDAQ:CTXS) is a leading developer and supplier of access infrastructure software and services. The company should continue to grow nicely over the interim as more and more companies turn to real-time collaboration services. Revenue is expected to be up 14% in 2013 thanks to Citrix Systems, Inc. (NASDAQ:CTXS)’s strong presence in the cloud computing and desktop virtualization space.
Citrix Systems, Inc. (NASDAQ:CTXS) is a leader in remote connectivity, this includes a service that you’ve probably used before, GoToMeeting. Its product and license updates/maintenance revenue should be pushed higher thanks to a growing customer base. Citrix also has partnerships with some of the largest tech companies in the world, including Cisco Systems, Inc. (NASDAQ:CSCO), Dell Inc. (NASDAQ:DELL), Hewlett-Packard Company (NYSE:HPQ) and Microsoft Corporation (NASDAQ:MSFT).
The stock did pull back following weak 2Q results, now down over 15% during the past three months, but I view this as a great buying opportunity. The stock trades at a trailing P/E of 32 times, but its forward ratio is only 16.5 times, suggesting investors might be underestimating Citrix Systems, Inc. (NASDAQ:CTXS)’s EPS growth.
Design
Autodesk, Inc. (NASDAQ:ADSK) develops, markets and supports design software, specifically for the manufacturing and construction industry. Autodesk, Inc. (NASDAQ:ADSK), like its software peers, is looking to adopt cloud and mobile computing. The company plans to offer its software via a could-based model.
However, this transition could take more time than say Adobe Systems Incorporated (NASDAQ:ADBE)’s, where Autodesk, Inc. (NASDAQ:ADSK) caters to the manufacturing and industrial markets, which can be laggards in technology adoption. Management has a lackluster outlook for fiscal 2014 given the weakness in spending on technology.
Autodesk, Inc. (NASDAQ:ADSK) also posted weak 1Q EPS results, where earnings fell 30% year-over- year. Operating margins were also down from 16% to 14.3% year-over-year. Since the announcement, analysts have lowered their consensus fiscal 2014 EPS by 8%, now expected to come in at $1.95, basically flat year-over-year from fiscal 2013.
Big Blue
International Business Machines Corp. (NYSE:IBM) operates three major segments, global services, software and systems. International Business Machines Corp. (NYSE:IBM), also known as Big Blue for its blue packaging, is looking to move away from low-margin hardware to the higher-margin software and services business. In 2012, hardware only accounted for 17% of sales, and its services segment accounted for 56% and software 24%.
The other big positive for International Business Machines Corp. (NYSE:IBM) shareholders is the company’s ability to return cash to shareholders. From 2000 to 2012, International Business Machines Corp. (NYSE:IBM) returned some $150 billion to shareholders in the form of dividends and share repurchases. I like IBM as a long-term buy, in part because of its solid record for buybacks, which has helped boost the tech company’s return on equity to over 80%.
