I wish I could use Photoshop on all of the stocks that I rip into every week in this column.
It would be easier to be nice. I could tone down the blemishes and replace rubble in the background with sunny vistas. In a few mouse clicks and brush strokes, dogs would be darlings.
Unfortunately, beauty is only graphic-design software deep.
This isn't supposed to be a pretty column. I take jabs at what I think are overpriced stocks. I'm not a bad person, though. I come right back with three more that I think will be better portfolio replacements.
Who gets tossed out this week? Come on down, Adobe Systems (NASDAQ:ADBE).
Flash in the pan
Fists are flying between Apple (NASDAQ:AAPL) and Adobe.
Flash is at the heart of the back-and-forth, since the iPhone -- and upcoming iPad -- don't support Adobe's popular online video and Web interactivity platform.
Analysts were all over Apple for sidestepping Flash support when it introduced its iPad a week ago. How can the quintessential couch potato gadget not back the video platform that YouTube, Hulu, and countless other video-sharing sites rely on? The iPhone has a workaround -- serving up YouTube videos within a dedicated app -- but it's a common complaint as folks surf to sites with embedded Flash video content.
Why don't the iPhone and iPad support Flash? Apple suggests that the platform is a slow resource hog, especially on handheld devices. Adobe counters that Apple is simply trying to protect its proprietary platforms.
This may all become moot as website developers embrace HTML5 -- the next-gen webpage language that supports video playback within updated browsers.
This would be bad news for Flash, even if it's a huge moneymaker for Adobe. It would certainly diminish Adobe's brand -- and that's something that the company behind Photoshop, Acrobat, and Dreamweaver can't necessarily afford.
Shares of Adobe have more than doubled since bottoming out last year. In other words, expectations are high.
Adobe hasn't lived up to those gains just yet. Revenue in its latest quarter fell 17%. Apologists will point to the 9% sequential uptick, but nearly half of that growth came from its recent Omniture acquisition.
Bulls believe that Adobe's fortunes will pick up as the economy improves, with IT departments and tech hobbyists upgrading their design and documentation software in droves.
Will they? Apple isn't the only company eating away at Adobe's good name. Microsoft (NASDAQ:MSFT) has XPS going after Adobe-authored PDF documents and Silverlight as a Flash alternative. Google (NASDAQ:GOOG) has primitive video-editing tools on YouTube and its Google Docs suite of cloud-computing apps will continue to broaden.
Diehard Adobe fans will laugh at these superficial jabs given the software company's in-depth offerings. I agree -- for now. However, evolution breeds irrelevance fairly quickly in these cloud-computing times.
If you don't believe me, let's dive into Adobe's financial expectations. Adobe earned $1.54 a share in non-GAAP earnings during fiscal 2009, with $2.95 billion perched on the top line. Analysts see the software developer earning $1.80 a share on $3.59 billion in revenue this year, before stepping up to a profit of $2.07 a share on $3.95 billion in fiscal 2011.
These may seem like healthy steps, but the 2009 and 2010 numbers are depressed. Adobe earned $2.07 a share in fiscal 2008 on $3.58 billion in revenue. In short, this three-year trip will find revenue climbing 10% (and lower, organically) and earnings essentially going nowhere. We're not even at the midpoint of this roundtrip to nowhere, yet the stock has doubled over the past year.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.
Intuit (NASDAQ:INTU) -- The software accounting giant recently began advertising its website service, offering hosting and easy Web design for as little as $4.99 a month. Dreamweaver pros have a right to laugh at Intuit's template-driven simplicity, but it works as a basic online presence. A simple Intuit site and a Constant Contact (NASDAQ:CTCT) opt-in email authoring platform will do just fine for many small businesses. Intuit's growth has also been more consistent than Adobe's spurts, and it's trading at just 14 times next year's projected profitability (versus a multiple of 16 for Adobe).
- Apple -- If any company butts heads with Apple, I'll side with the Cupertino tastemakers nearly every time. Forget the iPad hype. In fact, Wall Street already has. Apple is selling enough iPhones and MacBooks these days to keep growing at a healthy clip.
- Netflix (NASDAQ:NFLX) – Netflix is the only company to get premium online streaming right -- with nearly half of its 12.3 million subscribers as active Web viewers. Is the fact that CEO Reed Hastings sits on Microsoft's board the reason the company went with Silverlight over Adobe's Flash? It doesn't matter. Netflix is championing the delivery of rich media without Flash plug-ins. Coming off a monster quarter where revenue and earnings grew 24% and 36%, respectively, it's also earned its recessionary stripes (unlike Adobe).
Sorry, Adobe. Putting out Acrobat doesn't make you nimble.
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Microsoft is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers pick. Apple, Adobe Systems, and Netflix are Motley Fool Stock Advisor selections. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services, free for 30 days.
Longtime Fool contributor Rick Munarriz always takes out the garbage. He does not own shares in any of the stocks in this column, except for Netflix. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.