Foolish Forecast: An Adobe Gold Rush

Tuesday night, we'll get a third-quarter update from digital media maven Adobe Systems (Nasdaq: ADBE). I was a bit disappointed in the second-quarter report, but the stock is cheaper now and expectations should be lower.

Is the bar set low enough now? Read on for the verdict.

What Fools say:
Here's how Adobe's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Microsoft (Nasdaq: MSFT)	$248.7	14.6	***
Google (Nasdaq: GOOG)	$137.1	28.6	***
Apple (Nasdaq: AAPL)	$128.0	28.2	***
Adobe	$21.1	26.5	****
Autodesk (Nasdaq: ADSK)	$7.6	21.9	*****

Data taken from Yahoo! Finance and Motley Fool CAPS on Sept. 15.

CAPS player greenwave3, who gives this stock a thumbs-down rating at the moment, sums up the pros and cons of owning Adobe quite succinctly: "Great products, but not a solid investment at these levels. P/E is consistently way too high, and growth seems rather tempered."

What management does:
To answer some of greenwave3's concerns -- and my own -- have a look at the recent earnings growth. When P/E ratios come in at about half of the earnings growth rates, it's a great sign for value investors. The five-year forward PEG ratio (a.k.a. Fool Ratio) is a very reasonable 1.28. Cheap it ain't, but it's also not insanely overvalued.

Margins	3/07	6/07	8/07	11/07	2/08	5/08
Gross	88.8%	88.3%	88.5%	88.8%	89.3%	89.9%
Operating	22.1%	22.4%	25.5%	27.2%	29.1%	30.2%
Net	21.2%	21.4%	23.4%	22.9%	23.5%	24.3%
FCF/Revenue	34%	36.4%	40.8%	41.4%	42.9%	40.8%

Growth (YOY)	3/07	6/07	8/07	11/07	2/08	5/08
Revenue	19.6%	17.1%	21.9%	22.6%	32.3%	32.1%
Earnings	(2.1%)	8.4%	43%	43.1%	46.8%	50.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
This is the Klondike rush of data management and content display technologies, as all these large, established competitors are making the largest land grabs they can. Once consumers and corporations have locked in on their preferred solutions, it will be too late to change the status quo, and the respective market shares will stay intact while the global appetite for digital content continues to grow.

Fortunately for Adobe, the company is already an established leader in a couple of sub-markets. Flash-based video streaming is becoming the de facto standard for online video sites large and small, despite the best efforts of Apple's Quicktime team and Microsoft's newer, slicker Silverlight solution. And without Adobe's Acrobat and its PDF document format, information distribution in the business world would look very different indeed.

In short, I expect to see another positive report this week. Wall Street analysts tend to have more MBA credentials than nerdy tech know-how, and they often underestimate the magnitude of tech-based market opportunities like Adobe's. In the past five years, the share price has doubled while the S&P gained a measly 20%, and Adobe topped analyst expectations in 19 out of those 20 quarters.

The shares are reasonably valued, the future looks bright, and Adobe should continue to crush the market for many years.

Further Foolery:

• The One Stock You Must Buy
• Somebody Should Buy Adobe
• The Best Technology Tim Beyers Has Ever Seen