Adobe Systems Inc. (NasdaqGS: ADBE) = Strong Buy ADBE shot up over 11% yesterday after beating earnings expectations and reiterating its previous Q2 guidance. The message from the chart below is that the stock has much more upside. Dating back to the late 1990s, ADBE's stock (adjusted for dividends and splits) has been correlated with the 12-month rate-of-change of consumer prices for software. However, since last September ADBE's stock price has diverged from overall software prices, a trend that we expect will reverse in coming quarters. Despite the recession, software prices are on the verge of exiting deflation, (i.e. the 12-month rate-of-change of software prices is close to turning positive for the first time in years). The main reason for software price resilience is that businesses typically do not cut software spending as much as other expenses during recessions given software improves productivity and will help maintain a lid on costs. Thus, there is economic evidence that suggests ADBE's stock will continue to build on yesterday's gain, barring another drastic decline in the overall market. In fact, it is highly likely that the stock price will converge with the trend in overall software price growth. Encouragingly, ADBE's valuations are cheap. True, its P/E multiple is 11.61, which is just below the software industry average. However, on a price-to-book basis (P/B), it is considerably cheaper than its industry. ADBE's P/B is 2.2 while other large software producers have a P/B between 3-4.
$21.95 (03/24/09)
