Pivotal Likes Adobe, But Loves Salesforce

Adobe Systems Incorporated ABDE is up 34 percent this year, outperforming the S&P 500 up 8 percent. It’s also trading 20 percent higher than Pivotal analyst Brian Wieser’s price target, but the analyst downgraded the company from Hold to Sell, with a price target raise from $109 to $112.

The move seems counter-intuitive, especially considering Wieser views Adobe “in a more favorable light than all but a handful of the other companies we cover.”

“The business appears to be well run, its customers generally like them, their long-term strategy is consistent with views we have formed from our own industry experience and ongoing interactions with practitioners, and there are no particular reasons to say any of this changes any time soon,” said Wieser in a note.

He also estimates revenue growth ahead of guidance to be announced in the company’s second-quarter report next week.

That being said, when it comes to the marketing and advertising software industry, the analyst would rather be exposed to other companies.

A Force In The Long Term

Specifically, Wieser believes salesforce.com, inc. CRM, Adobe’s closest peer, has a more favorable risk-reward trade off.

The company is up 27.5 percent this year, and Wieser places its price target at $83.

The analyst believes that although Adobe’s fundamentals are “excellent,” they do not justify its current outperformance.

Wieser sees marketing technology software as an inherently lower margin market than the rest of Adobe’s creative cloud, and a changing revenue mix will constrain the company’s margins.

“By contrast, Salesforce.com has indicated it presently constrains its margins in order to support faster top-line growth. As the company matures, operating income margins are expected to increase,” said Wieser.

This leads to the belief that Salesforce will see greater long-term cash flow growth despite similar revenue growth expectations as Adobe.

At time of publication, shares of Adobe were down 3.41 percent at $133.34.

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