There's Still Money to Be Made in Forgotten Activism
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
ValueACT recently started a new activist campaign over at Microsoft, but I believe there's still inherent value to be found in the hedge fund's other major stake in tech. In late 2011, ValueACT took a 5% stake in Adobe Systems (NASDAQ: ADBE) and since then the stock has outperformed the broader market by 100%.
ValueACT Capital has a 31.3 million share position in the stock, which makes up 15.4% of the fund's public equity portfolio. ValueACT owns 6% of Adobe. Currently, ValueACT's position in Adobe makes up a larger position than Microsoft.
ValueACT also has a few major hedge funds as fellow owners, including Viking Global with 7.1 million shares, Luxor Capital 2.8 million and billionaire Ken Griffin's Citadel Investment Group with 2 million.
Adobe creates software and services for creation, distribution, management and tracking of digital content. Its staple product includes Creative Suite and the company's latest initiative has been to switch form a pay-upfront model to a subscription model.
Adobe's revenue is expected to be down 7% in fiscal 2013 as it shifts to a subscription model. The fall in revenue is likely to persist for several years as the timing of revenue is shifted, but the long-term benefits are a big positive. Its digital- media segment is its bread-n-butter, making up 70% of revenue. And what this segment does is it enables small businesses and enterprises to create content, deliver it, and ultimately optimize it.
Where Adobe caters more to the graphic-design market market, Autodesk (NASDAQ: ADSK) is another major software business, focusing on engineers and the like for creating designs in the manufacturing, architectural and civil- engineering markets. Around 85% of revenue comes from indirect channels (i.e. re-sellers).
Meanwhile, the company is also relatively diversified geographically, with 35% of revenue derived from the Americas, 40% from Europe, the Middle East and Africa, and the remaining 25% from Asia.
Revenue is expected to be up a modest 4.4% in 2012, but growth should ramp up nicely in the future as Autodesk moves to incorporate social- and mobile- computing offerings. One of the big tailwinds for Autodesk should be a rebound in the construction and infrastructure markets, including increasing urbanization of emerging markets.
Citrix Systems (NASDAQ: CTXS) is a leading developer and supplier of access infrastructure software and services. Citrix designs, develops and markets products and services that enable information technology to be delivered securely on demand, which includes its key GoToMeeting product. I like Citrix's virtual- desktop model, as it gives its users impressive flexibility.
Revenue is expected to be up some 15% in 2013, as companies expand their IT budgets. As well, the other big positive for the company is Citrix's move to cloud computing. So far this year, Citrix's key contracts have been from the bustling financial services and healthcare sectors.
I think the desktop-virtualization market will be one of the fastest growing segments in the future. The market is expected to hit upwards of 100 million users this year, according to Gartner, and Citrix has pegged the the personal cloud- computing market as becoming a multi-billion dollar opportunity by 2015.
ValueACT's second largest public-equity portfolio holding, Adobe, still appears to be a solid investment. Meanwhile, the other major software companies are also intriguing buys. Analysts expect Adobe to grow EPS at an annualized 11.7% over the next five years, AutoDesk 13.2% and Citirx 13.8%. All of the companies operate in the high-margin software business, and it wouldn't be unreasonable to buy up each of them.
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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. 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!