Adobe Systems Incorporated (ADBE): Are You Invested?

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Adobe Systems Incorporated (NASDAQ:ADBE) failed to make our list of top ten tech stocks loved by hedge funds last quarter, but we believe it is one of the best investments available in the software and programming industry. Adobe saw its most recent fiscal quarter (4Q) come in with higher revenue, as a result of better adoption rates for cloud computing services. The company has a diverse suite of products that should help drive interim growth, and a bullish IT environment in the U.S. and Europe certainly won't hurt.

SAC CAPITAL ADVISORS

Adobe is leading the way in the field of paperwork digitization and record-keeping, and almost all of its revenues come from licensing fees. Given a large portion of its revenues are from this arena, Adobe enjoys a much higher EBITDA margin than its peers at 34%. Adobe also has billionaire Steven Cohen of SAC Capital as one of its big-name investors; Cohen upped his stake by 400% last quarter (see Steven Cohen's top picks).

Weakness in one of Adobe’s largest markets, Europe, forced it to fall below $20 in 2009, but the stock has since rebounded and is up 30% year to date. Adobe has impressive product lines that sport an average life cycle of about 24 months, allowing for higher lifetime revenue per customer. Adobe trades relatively cheap when compared to major peers at only 15 times forward earnings, which is also well below its five-year average P/E of 20x.

From a top line standpoint, Adobe trades at 4.2 times sales, where the average of its major peers is around 5.1x. If shares of the company did trade more in line with its peers, there's an upside price of around $43 – 13% higher than its current trading price.

Looking at one of Adobe's key competitors, Autodesk, Inc. (NASDAQ:ADSK) is a design and drafting software company that appears to present another solid ‘growth at a reasonable price’ opportunity. Autodesk offers investors one of the best expected EPS growth rates at 17%, and sports a bargain-bin sales multiple of at 3.4x. After a near 25% slide from its high of $42.69 earlier this year, Autodesk now trades at a measly PEG of 1.0. In the third quarter, billionaire Dan Loeb took a new, rather large stake in Autodesk (see Dan Loeb's newest picks here).

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