Adobe Systems Incorporated (ADBE), Intuit Inc. (INTU): There’s Always Upside in the Software Industry

The software industry seems to always offer compelling investment opportunities, as many niches still remain untapped. ACI Worldwide Inc (NASDAQ:ACIW), Adobe Systems Incorporated (NASDAQ:ADBE) and Intuit Inc. (NASDAQ:INTU) are three companies that have successfully established in the segment, grasping substantial market shares. Going forward, these firms hold various growth catalysts that should boost earnings and stock prices. Let´s take a closer look at them and try decide if they comprise wise long-term investments or not.

Payments that pay out

ACI Worldwide Inc (NASDAQ:ACIW) and its subsidiaries develop, market, install, and support software products and services that enable electronic payments in more than 35 countries. Despite some managerial missteps in the past, the company now seems poised to grow. International markets provide the most opportunities, while the U.S. market looks too mature already. In fact, overseas markets and the acquisitions of S1 Corp (NASDAQ:SONE) and Online Resources Corporation (NASDAQ:ORCC) have and will most likely continue to create synergies and drive revenue growth in the upcoming years.

The company’s main product is BASE24, a collection of electronic payment software products used by banks (about one out of five major global banks) and payment processors like Visa Inc (NYSE:V), American Express Company (NYSE:AXP) and Mastercard Inc (NYSE:MA). The embedded nature of this software, combined with high switching costs, create high client stickiness that is evidenced by the firm’s long-lasting customer relations.

In addition, the annuity-like nature of Aci’s revenue stream and the minimal capital expenditures required to maintain its products have provided it with steady cash flows. (Morningstar) This strong cash position should enable the firm to pursue growth through diverse avenues, including international expansion and acquisitions.

Expected to deliver an average annual earnings per share growth rate around 20% over the next five years while trading slightly below industry average valuations, this stock looks pretty attractive for long-term investors and I would recommend BUYING.

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Adobe Systems Incorporated (NASDAQ:ADBE) provides graphic design, publishing, and imaging software, leading the industry in terms of innovation and brand-strength, which helps it create strong network effects and high switching costs amongst creative professionals. However, “competitors offered cheaper alternatives, so when Adobe stumbled with prolonged and erratic upgrade cycles, revenue and user growth slowed.” (Morningstar)

As many analysts highlight, Adobe Systems Incorporated (NASDAQ:ADBE)’s future is in the cloud; the transition of its business to the cloud should help solve the aforementioned problems by offering shorter upgrade cycles and allowing the company to respond more quickly to evolving user demands and needs. Moreover, this migration will come coupled with a new subscription model that will replace the one-time payment paradigm. The benefits of this particular strategy stem on the recurring nature of the revenue it generates and the possibility of more deeply understanding customer trends. In addition, more affordable fees will help attract new customers that wouldn´t have been able to access these products before. Although margins are already above industry averages, this model should help further widen them.

Credit: Adobe Systems Incorporated (NASDAQ:ADBE)

Trading at about 31 times its earnings (a 17% discount to the industry average) while offering a moated brand and compelling growth prospects, I’d recommend BUYING and holding on to Adobe Systems Incorporated (NASDAQ:ADBE)’s stock.

Follow your intuition

Intuit Inc. (NASDAQ:INTU) provides business and financial software solutions to both individuals and businesses. Its products aim to simplify the management of small and mid-sized businesses, payroll processing, personal finances, and tax preparation and filings. Although the industry is highly competitive, Intuit Inc. (NASDAQ:INTU)’s wide product offering provides it with an important edge over its peers as it cannot be matched by any single competitor. Moreover, high switching costs have also helped the firm to dig a wide moat around itself, keeping competitors lagged.