Magento Buy Keeps Adobe Systems Inc. Stock Expensive but Worth It
Adobe Systems Incorporated (NASDAQ:ADBE) is paying $1.68 billion to buy privately-held Magento Commerce and enable transactions on what it calls its Experience Cloud. IT’s a move that looks good for the future of Adobe stock.
The Adobe press release on the deal emphasized Magento’s work with major brands such as The Coca-Cola Co (NYSE:KO), but many Magento customers are small and medium sized businesses.
Thus, while the deal hit stock in Shopify Inc (NASDAQ:SHOP) hard, the target is actually salesforce.com, inc. (NASDAQ:CRM), which bought Demandware in 2016 to get the same e-commerce capabilities Adobe is buying with Magento.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Salesforce and Adobe are becoming increasingly similar companies. While Salesforce stock is up 50% over the last two years, Adobe stock has risen 137%. Adobe’s market cap of $117 billion is now $23 billion ahead of Salesforce’s $94 billion. This is true despite Salesforce having over $10 billion in sales last year and Adobe $7.3 billion.
Adobe and Microsoft
I have been high on Adobe stock for some time, calling it the “Nvidia Corporation (NASDAQ:NVDA) of software” in January, despite a valuation many investment analysts found scary. The shares are up by about one-third in 2018.
The decision by CEO Shantanu Narayen to rent software through clouds rather than sell it has proven to be one of the smartest moves of the decade, as it brought the company far beyond its original niche in publishing and media, directly into marketing and, now ecommerce.
Along the way, Narayen struck a strategic relationship with Microsoft Corporation (NASDAQ:MSFT) that now extends around the world. Azure is now available in 140 countries and offers up to 1.6 Petabits (a petabit is 1,000 gigabits, kids) of bandwidth in each region.
Such relationships with profitable cloud software players are key in the growing war among the Cloud Czars, with a staggering $27 billion spent on so-called “hyperscale” data centers during the first quarter alone.
It takes enormous amounts of business to fuel that kind of capital spending, and that’s precisely what Adobe aims to deliver by getting into commerce services.
Adobe’s AI Push
Fueling Adobe’s rush to get that business is Adobe Sensei, an application program interface that delivers artificial intelligence capabilities to web sites. Since Sensei was announced in 2016 Adobe stock has taken off, taking the company deep into hardware, as with a recent partnership with Nvidia to optimize Sensei for Nvidia chips.
Sensei competes with Salesforce’s Einstein product, which is based in marketing rather than graphics. Adobe’s success, and the Magento buy, may now push Salesforce to make its own AI acquisition.
Adobe is next due to report earnings for its second fiscal quarter on June 21, with analysts expecting net income of $1.25 per share, about $625 million, on revenue of $2.15 billion.
That would be slightly less income, on slightly more revenue, than in the first quarter. The rise of Adobe stock has been fueled by its ability to easily beat these estimates, with $1.44 per share expected last quarter and $1.55 per share delivered.
Yes, Adobe Stock Is Pricey
The best tech investments have never been cheap to get into, and Adobe stock is no exception.
At its May 22 opening price of about $238 per share, investors are paying 63.5 times earnings, and almost 17 times revenues, for the stock. But two years ago, the stock was also considered expensive, at $93 per share.
All this means that while Adobe, like the other big techs, remains vulnerable to a general business downturn, it’s the kind of stock that can deliver big long-term gains to young investors. The price is also supported by an $8 billion buyback, announced May 21, running through 2021.
It’s not going to get any cheaper.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.
More From InvestorPlace
The post Magento Buy Keeps Adobe Systems Inc. Stock Expensive but Worth It appeared first on InvestorPlace.
