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Expect Greatness From Adobe

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So Adobe's (Nasdaq: ADBE  ) third-quarter profits were slimmer than last year's. Well, get over it. The master of digital information creation and packaging is perfectly positioned for a couple of truly fabulous quarters.

GAAP net income shrank by 6.6% year over year, landing at $191.6 million. A generous share buyback program still boosted earnings per share to $0.35 -- a penny ahead of last year's take. More importantly, sales grew 4% to $887 million, despite the fact that we're comparing these figures to the wildly successful launch of Adobe's flagship product package, Creative Suite 3. It's like comparing kumquats to watermelons, and the tiny sweet-and-sour citrus fruit still comes up big.

In other words, business is strong even in the face of financial disasters and skies falling all around Adobe's ears. The best news of all? This is the platform from which the company now gets to launch Creative Suite 4 in a couple weeks. Take a look at how sales and earnings skyrocketed on the back of CS3, and then tell me that you're not excited about the potential of this encore. With a straight face, please.

Banks and insurance companies hardly form the core of Adobe's target market. Economic trend-averse companies like Walt Disney (NYSE: DIS  ) , SeaChange International (Nasdaq: SEAC  ) , and Google (Nasdaq: GOOG  ) are the real audience when Adobe speaks. That's why I expect great things from these guys in the coming quarters. And Mr. Market hasn't adjusted his expectations to match the opportunity yet. Adobe's stock trades at 25 times trailing earnings now, compared to a P/E in around the 30s this time last year. Looks like a mismatch to me.

Microsoft (Nasdaq: MSFT  ) is trying to dethrone Flash with its Silverlight alternative, and Apple (Nasdaq: AAPL  ) has its own suite of image processing and movie-making tools to challenge Adobe's Fireworks, Photoshop, AfterEffects, and so on. But with the business momentum Adobe is showing, I'd hate to compete directly with Adobe right now -- even if my name was Steve Jobs or Steve Ballmer. But I'd love to invest in it.

Further Foolishness:

Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers selection. Walt Disney and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares of Google and Disney, but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure likes its moats deep, wide, and filled with mutant sharks.

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  • Report this Comment On November 18, 2008, at 3:10 PM, NewAgeBuyer55 wrote:

    I don't agree with the article. I think Adobe's stock at $21 is still overpriced. Adobe has focused on short-term profit at the expense of its partners, and to the annoyance of its customers. You can get away with that in good times, but not now.

    Adobe buying Macromedia was the first step toward inhibiting innovation. Out of respect, I won't get negative on what I hear about partner abuses.

    Until Adobe fosters more innovation (not just buying up other companies), promotes partnerships, and treats customers as more than upgrade revenue, you will see the stock keep falling.

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