Weekend financial mag Barron’s uses a Web 2.0 hook this week to hang a buy recommendation on Adobe. The combination of tools, Flash, Flash Lite, Apollo, and growth in 2.0-ish interactive web properties has the publication thinking Adobe looks like a buy at these prices.
For the fiscal year that ends this November, the company is looking for revenue growth of 15%, which would mean about $2.96 billion, up from $2.6 billion in ’06. Margins are expected to come in at around 37%, a major leap forward after the downturn last year that followed the Macromedia deal.
Do the math and Adobe appears to be looking for earnings of about $1.44 a share, up 17% from last year. But that estimate, as well as the higher consensus target of just under $1.50, is probably too low. Demand for the updated software should remain brisk; surveys show that more than two-thirds of those using CS2 plan to upgrade, half of those within three months. And given the strong pricing, sales could come in half-a-billion or more above Street hopes.
The upshot: Earnings could approach $1.60 this year, up about 30% from last year. That makes the high P/E ratio far more palatable. And earnings could climb to $1.80 next year.
While this is an old story to readers of this site, and I’m far less optimistic about Apollo than is Barron’s, it’s a general thesis I buy into.