There's Always Potential in the Software Industry

Awais is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For investors with secure jobs and a stable working environment, devoting savings to invest in high-growth stocks can be a perfect way to achieve diversification of their current capital.

Application software industry

The software industry has been changing so rapidly that a company needs to be on the move to keep ahead of its competitors. The U.S. software industry accounts for 42.6% of the global software market's value.

Over the past decade, cloud service solutions have gained greater market acceptance as more and more companies switch to utilize cloud ERP solutions. Mergers, acquisitions, partnerships and strategic alliances among business software suppliers have been very active for quite some time now. The software vendors continue to include new functions to their software through product development and acquisition.

Adobe Systems (NASDAQ: ADBE) has recently spent $600 million to increase its abilities and battle more efficiently with the rivals which include Oracle (NYSE: ORCL), International Business Machines (NYSE: IBM), and Salesforce.com (NYSE: CRM). These software competitors have, in fact, focused on three databases: namely Oracle, Microsoft SQL Server, and IBM DB2.

Adobe’s acquisition of Neolane: a positive or a negative move in the quest for growth?

Let’s take a closer look at Adobe’s recent acquisition of Neolane and try to analyze if it is a wise long-term investment or not.

Adobe’s business shift towards the creative cloud has helped shorten upgrade cycles, allowing the company to respond more quickly to changing user demands. This strategy benefited Adobe due to the recurring nature of its revenue. Even though margins are already above industry average, this has helped further widen them.

Adobe acquired privately owned Neolane, a French digital marketing company, for $600 million cash.

Adobe is the biggest maker of graphic design software. Its software portfolio includes Photoshop, After Effects, and Dreamweaver. Neolane is expected to unite with Adobe’s Marketing Cloud product line to strengthen Adobe’s visibility. The company works on producing tools that help marketers link up with customers through the internet, email, mobile devices, and direct mail by providing a place to administer and automate marketing. Neolane will add key cross-channel management capabilities to Adobe.

Neolane reported $58 million in revenue in fiscal year 2012, representing a 40% annual growth, compared to the previous year. A quarter of its sales were made in the U.S. The acquisition can add up to at least $0.12 per share in revenue for Adobe’s shareholders.

Neolane will prove to be a good complement to Adobe's existing strengths in the fields of web analytics, content management, audience optimization, and customer experience management.

Possibly the market moves made by Oracle and Salesforce.com didn't leave Adobe with much choice if it wished to continue to build on its integrated digital marketing as a comparative advantage.

Salesforce.com agreed to buy Exact Target for $2.5 billion during the previous month. Oracle acquired Eloqua last year for $871 million while Teradata purchased Aprimo in 2010 for $525 million.

Oracle and Salesforce.com recently declared a complete nine year partnership plan, covering all three layers of cloud computing: Applications, Platform and Infrastructure. Salesforce.com had been using Oracle software, but now the company has moved towards utilizing Oracle hardware as well. This has been a major move for the company. The two companies also plan to integrate their clouds.

Also, Oracle and Microsoft entered into a partnership. Now, Microsoft’s customers can operate Oracle’s software on Windows Server Hyper-V and Windows Azure. Customers will be able to install Oracle’s software including Java, Oracle Database and Oracle WebLogic Server on Windows Server Hyper-V or Windows Azure and will get full assistance from Oracle.

To stay ahead of its competitors, IBM has also recently launched its Big Data Technology for radically faster data analysis and decision making. It is expected to offer industry leading performance, scale, and reliability on the user’s choice of platform from Linux, UNIX and Windows to z/OS.

Conclusion

With Adobe’s stock trading at approximately 32 times its earnings and a 17% discount to the industry average, it is offering promising growth prospects. I would advise buying stock in Adobe for investors who can lock their investment for a few years as the company does not provide regular income. Since 2006, Adobe has not paid any dividends.

Salesforce.com is also a non-dividend paying company and should be sold as it is declaring negative net income from the past 2 years.

For an investor looking for a regular income stream, IBM is the stock to buy as the company has been increasing dividends per share since 2003. With its recent launch of DB2 technology, the company looks forward to increasing its annual dividends by 47%, as displayed by its dividend history. Oracle also pays a dividend since 2009, and is expected to increase its annual dividend by 14% in 2013. Overall, IBM should be bought and preferred over Oracle, as IBM is offering a higher dividend yield of 1.72% compared to Oracle’s 1.26%.


Awais Iqbal has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and Salesforce.com. The Motley Fool owns shares of International Business Machines. and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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