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Why We Added A Revitalized Adobe To Our Portfolio

 May 08, 2012 09:06 AM

Covestor model: Soundview Technology

Disclosure: Long ADBE

Over the course of April, we filled out our portfolio and eliminated our 14% placeholder position in the PowerShares QQQ Trust Series 1 (QQQ). Our new positions include: Adobe (ADBE). We have been waiting for the right moment to buy Adobe over the past year or so.

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The shift to "mobile first" development and rejection of Adobe Flash in favor of HTML and other toolsets have knocked the company for a loop. However, as we expected, Adobe has been remaking its strategy and will soon be shipping the next version of its flagship product Creative Suite 6. This will be the first version available as a Software as a Service, or SaaS, offering hosted on the cloud. There is still some debate in the market as to what extent the monthly subscription option might cannibalize their core software and upgrade business, but we see that as a distraction.

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Fundamentally Adobe has fended off any and all realistic competition for serious digital development projects. We actually expect the SaaS option to finally entice reluctant customers to move off older versions like CS3 and CS4. A casual user isn't going to pay several hundred or more than $1000 to upgrade to a new version. So the monthly option is perfect for them.

It's possible that some who might purchase could opt for the SaaS version but since this is generally "higher multiple" business from an investment standpoint, we are not concerned about the potential mix shift. Finally, Adobe shares at current prices are well below our intrinsic value (IV) estimate of $50.

Qualcomm (QCOM) is another well-known name in the mobile space. The company has been executing extremely well and is one of those unassailable players in mobile infrastructure. With our analysis complete and a long-term IV of $100, the shares justified an initial position.

Then there is Enphase Energy (ENPH).  Enphase makes inverter technology which is needed to take the DC from solar cells and panels and create AC for use. Solar has been a frustrating area for most investors. It's a great secular growth story and the technology is steadily improving. Yet unit prices decline faster than volume can ramp up.

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