Tech stocks are back. Apple is scaling new highs while Netflix soared after last week’s record-breaking subscription numbers. Sure, it’s unrealistic for tech to repeat last year’s Covid-induced rally, but 2021 still holds upside for several tech names. On the flipside, markets are currently seeing alarming gains in Gamestop stock (really, a retail stock) and Blackberry. Perhaps, some tech stocks are too popular. Here’s a look:
Everyone knows Adobe as the maker of Photoshop, Acrobat and Flash. These products have long been used by consumers and businesses and form Adobe’s identity and enduring success among tech stocks. In fact, these three apps make up a big part of Adobe’s Digital Media segment, which in turn comprise over 70% of company revenues. Those revenues flow from subscription-based cloud services, which took six years to transition out of old-school boxed, licensed software, and prevents piracy and therefore increase earnings.
With shares climbing 35% in the past 12 months (roughly equal to fellow tech stocks Microsoft), how much room is there to run for Adobe stock.
Credit CEO Shantanu Narayen for transforming Adobe from boxes to subs to become one of the few legacy software companies to survive in the cloud-computing age. According to Adobe’s last quarterly report of last December 10, subscription revenue rose 21% in 2020. Subs made up 84% of total revenue in 2014, but were 90% last year. Further, Adobe’s Digital Media business (Creative Cloud and Document Cloud) increased revenues by 20% in fiscal 2020 to $2.5 billion, driven by strong Acrobat subs and higher mobile and web traffic. Adobe’s Digital Experience unit of marketing software and services increased 12%. Notably, subcriptions revenue in Digital Experience jumped 14% to $696 million.
The company beat earnings estimates at $2.81/share vs. the street’s $2.66 as earnings jumped 23% and sales 14%. EPS topped guidance at $0.17 vs. the street’s $0.15.
Looking ahead, Adobe issued positive guidance for the current quarter and full year. For fiscal 2021, the company projects adjusted EPS at $11.20 on $15.15 billion in sales vs. Wall Street’s $11.17 on $14.78 billion. Compare this to 2020’s $10.10 and $12.87 billion.
Cash flow is health, up from $1.32 billion in Q3 to $1.4 billion in Q4. Adobe even bought back 1.6 million shares late last year.
Current lockdowns will continue to drive the work/stay-at-home trends, tech stocks and benefit Adobe whose products help advertisers manage and track their digital ad campaigns. Its software help users create all kinds of web content. Also, the Acrobat’s PDF format remains the gold standard for e-documents. These businesses remain Adobe’s bread and butter and are expected to drive growth.
Also, Adobe plans to successfully integrate its $1.5 billion cash purchase of Workfront last month into its Digital Experience segment. The company is investing in its PDF functionality, artificial intelligence, further integration of its content and commerce offerings.
Adobe struck some interesting partnerships last year. Adobe software will run in IBM‘s cloud system to offer marketing software to the tightly regulated banking industry. The hope is that this deal with lead to more banking functions turning digital.
Meanwhile, Adobe and Microsoft have struck a partnership in sales and marketing software, which will make them go head-to-head with Salesforce. For example, Walgreens has signed a deal with ADBE and MSFT to provide a “consumer insights platform.”
Management and the street expect solid growth. Adobe stock’s trailing PE is currently 42x which is the lowest level in the past four quarters; it traded at 60.26x at the end of last November. ADBE shares are trading right below its 50-day moving average of $484 and 200-day of $474 (rounded to the nearest dollar).
Speaking of Salesforce, this is a smart, successful company in cloud that specializes in customer relationship management, CRM, which happens to be its stock ticker. Companies use CRM’s software to reach more customers, track real-time analytics, deal with customer complaints and offer customer support. CRM stock is good at buying and integrating companies, such as last month’s purchase of the popular Slack platform for $27.7 billion. Salesforce revenues have doubled since 2017 and it’s beaten or matched EPS in its last four quarters. So, why isn’t Salesforce a screaming buy?
Well, the CRM stock’s PE is 56x. To be fair, that’s a lot better than 92.91x a quarter ago and certainly 200x a year ago. To compare to other tech stocks, Adobe trades at 43.75x and Microsoft at 36.66x. True, investors are tolerating higher-than-normal multiples these days, especially for tech stocks. The street has an average price target of $277.23 on Salesforce, which is $52 above current levels, but Salesforce still falls out of my comfort zone.
Verdict: Good company, expensive stock
Last Friday, IBM stock was pounded nearly 10% after it released a harsh quarterly report where total sales declined for the fourth-straight report across all five of its business segments. For example, its systems business plunged 17.8% while net sales slid 6.5%. There’s still hope that IBM’s hybrid cloud business will pay off, after the company bought Red Hat in 2019.
But is it enough to revive this company? Its five-year EPS growth is -7.2% while its high-for-a-tech stock 5.5% dividend yield (based on a 73.61% payout ratio) remains a red flag. Though anything can happen, IBM has failed to be a turnaround story.
Verdict: Sell, if you haven’t already.
Gamestop operates a retail chain of videogame shops in the age of Covid and online videogaming. In other words, its business model is outdated and is not technically in the tech stocks category.
However, on Friday, Gamestop stock rocketed 51%, but on Monday morning this week, they soared another 130%. The tsunami was triggered by short-seller Citron predicting that shares will plunge to $20 who then clashed with a Reddit group to unleash a massive short squeeze. This forces shortsellers to buy in order to stall bigger losses. The result: a massive spike. I’m no technical analyst, but this is crazy.
On Monday this week, BlackBerry soared as much as 35%. This comes a full week after this Canadian tech pioneer announced it had settled a patent dispute with Facebook. Fine and deserved, but there’s no rational reason for BB stock rocketing on Monday.
Let me say that BlackBerry remains a promising turnaround story run by a smart CEO, but the short-squeeze is also driving up this tech stock’s shares dangerously.
Verdict for both stocks: Don’t buy, but keep an eye on BB.