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2HRS2GO: Adobe investors have little to complain about

Despite posting better-than-expected sales and earnings in its second quarter, Adobe Systems shares drifted a tad lower Friday. For those looking to nitpick, there isn't much to complain about.

After the bell Thursday, the software developer reported net income of $65.8 million, or 51 cents a share, on record sales of $300.1 million.

Analysts were expecting a profit of 48 cents a share in the quarter.

Despite all this terrific news, including the confirmation that it will record at least 25 percent sales growth through the rest of the year, investors pushed Adobe (Nasdaq: ADBE) shares down 6 to 118 3/4.

This wouldn't be the first time traders sold on the news, regardless of how good the news was. After all, the stock's more than doubled since early March.

A little profit taking seems in order here.

But in the long run, people are going to want to hold this stock.

Thanks to the Internet, Adobe's had to change its business model a bit, placing more of an emphasis on Web publishing than its traditional core business of print publishing.

It's a transition the company's has mastered.

"Adobe's really done a good job in the past two years of integrating products for both print and Web publishing," said Jennifer Smith, an analyst at Dain Rauscher Wessels.

Earlier this week, Wit Capital Research reiterated its "buy" rating on the stock and predicted it would earn 49 cents a share in the quarter on sales of $298 million.

"With a strong product rollout in the second half of 2000 and strong company fundamentals, we believe that our current fiscal 2000 estimate of $2.09 may prove to be conservative," Wit said in a research report.

Keep in mind that Adobe's second-quarter sales were only 22 percent above the year-ago quarter when they earned $45 million, or 35 cents a share, on sales of $245.9 million.

Now it's just a matter of how gross margins, the key to this quarter's upside surprise, hold up in the next few quarters.

If you're looking for something to complain about, analysts said the company's InDesign product, which is targeting competitor Quark's installed base, has gotten off to a slow start.

During a conference call Thursday, Adobe officials said it probably won't meet the $100 million sales target it set for InDesign due to unexpected delays in getting the infrastructure in place.

Hey, if the worst thing that happens to Adobe is that it sells only $80 million or $90 million worth of InDesign this year, investors will be more than satisfied.

"Considering the choppy market we've seen since March 11, Adobe has held up," Smith said. "It's an excellent investment idea in the current market climate."

Last quarter, Adobe flew past analysts' estimates, earning $64.6 million, or 51 cents a share, on sales of $282.2 million.

Adobe shares moved up to a 52-week high of 132 in April after falling to a low of 33 13/16 last June.

Eleven of the 14 analysts tracking the stock rate it either a "buy" or "strong buy."

First Call Corp. consensus expects it to post a profit of 52 cents a share in the third quarter and $2.02 a share in the fiscal year.