This Tech Stock Will Not Let You Down

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

The latest buzzword in the tech world is surely Cloud. Everyone seems to be hooked on to cloud computing these days. The latest company to cash on in the trend is Adobe Systems (NASDAQ: ADBE), the makers of Acrobat Reader, Photoshop and Flash. Recent results of the company pointed towards a surge in the number of cloud subscribers, adding to revenues.

Good show

Adobe's latest quarterly earnings were impressive, stemming from high demand for its software subscriptions. While not high compared to the previous year, Adobe's earnings numbers were better than that expected by the analysts. The company raked in revenues worth $1 billion, as compared to $1.1 billion in the previous year. Net income amounted to $76.5 million, down from $223.8 million last year. Diluted earnings per share was $0.15, down from $0.45.

In the last quarter, the company added a massive 221,000 new subscribers for its Creative Cloud software. Launched in the second quarter of 2012, the software now has approximately 700,000 subscribers worldwide. Adobe expects the total to cross 1.25 million by the end of the fiscal year. In the Digital Marketing division, Adobe's Marketing Cloud offering has performed particularly well, bringing in revenues worth $229.6 million, up 17% from the previous year.

Not so good

Adobe's performance is impressive, especially considering the recent performance of peer Oracle (NYSE: ORCL). In its last quarter, Oracle's net revenue remained unchanged at $10.9 billion, missing analyst expectations. Revenue from new software licenses and cloud subscription increased by 1% to $4 billion, missing estimates by $0.2 billion. The company struggled with its software sales, casting doubts about its strength to stand up to the competition. Investors reacted by selling the stock, which fell by approximately 9% during after-hours trading. For the next quarter, Oracle expects software sales to grow by 0%-8%.

Adobe, on the other hand, is optimistic about the future, expecting revenues between $975 million and $1 billion in the current quarter. The company plans to bring about some changes in its software distribution in the next few months. For instance, Adobe will abandon Creative Suite and will now solely concentrate on Creative Cloud. As a result, newer versions of its software will only be available to cloud subscribers.

Big bucks

Adobe isn't the only company to try subscription based selling. Microsoft (NASDAQ: MSFT) is also providing the option of subscription for its latest offering, Office 365. Launched in 2011, the product can either be bought in one go or via monthly paid subscription. Office 365 is proving to be very successful at the moment. Microsoft's Business Division, which includes Office 365 already contributes to approximately 33% of the company's revenues. In the last quarter, the segment grew by 8%, bringing in revenues worth $6.32 billion. According to a survey by Spiceworks, usage of the product has nearly doubled to 30% in the last one year at small and medium businesses. Earlier this month, the company launched a mobile version for iPhone users. If the company were to launch a version for iPad, as planned, this would rake in additional revenues worth over $7 billion for Microsoft, factoring in the growing demand for Apple's machines. This will also prove to be beneficial for Apple, which wants to steal business away from competitor Google.

All in all

Adobe is a very good performing stock. Successful marketing of its Creative and Marketing Clouds can bring in a lot of revenue for the company. The main advantage of subscriptions would be generation of a regular cash flow for the company. The company has the potential for high earnings in the quarters to come. However, the stock is trading at a very high PE of 40, and this makes me a bit apprehensive about entering into a long position at the moment. The best bet would be to wait a bit until the stock falls from its near 52 week high rate and then take the plunge.

It's been a frustrating path for Microsoft investors, who've watched the company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In a new premium report on Microsoft, a Motley Fool analyst explains that while the opportunity is huge, so are the challenges. The report includes regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.


Sonam Chamaria has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and Apple. The Motley Fool owns shares of Apple, Microsoft, 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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