Today, we consider two tech stocks that play important roles on the Internet. Sierra Wireless is engaged in a growing phenomenon, connecting products to what is popularly known as the “Internet of Things.” Adobe Systems has long been a staple of Internet design, helping share documents in the well-known PDF format. While both are growth stocks, we feel Sierra is the better buy of the two right now.
SIERRA WIRELESS (Toronto symbol SW; www.sierrawireless.com) makes modules that connect products—including smart electricity meters and vehicles—to the Internet. This is known as machine to machine, or more generally as the Internet of Things.
In the three months ended March 31, 2015, the company’s revenue rose 24.1%, to a record $150.4 million from $121.2 million a year earlier (all figures except share price and market cap in U.S. dollars). Sierra continues to add new customers.
Excluding one-time items, the company earned $7.2 million, or $0.22 a share, compared to just $483,000, or $0.02, a year earlier. Sierra sold more high-margin cloud-based services to large customers during the latest quarter. It also cut its costs.
To stay ahead of the competition, Sierra devotes a high 15% of its revenue to research. It’s also making acquisitions, but it’s focusing on smaller software firms and companies with specific expertise in connecting machines.
The company holds cash of $99.6 million, or $3.10 a share, and has low debt. The stock trades at 25.1 times Sierra’s forecast 2015 earnings of $1.26 a share. That’s high, but it’s still acceptable in light of the company’s high research spending and strong prospects in an expanding industry.
Recommendation in Stock Pickers Digest: BUY.
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Growth stocks: Despite strong demand for its cloud-based services, Adobe likely to see earnings hurt by high U.S. dollar
ADOBE SYSTEMS INC. (Nasdaq symbol ADBE; www.adobe.com) makes software that lets computer users create, edit and share documents in the popular PDF format. Graphic designers also use its programs to create print publications and web pages.
In its fiscal 2015 second quarter, which ended May 29, 2015, Adobe earned $0.48 a share, up 29.7% from $0.37 a year earlier. Revenue gained 8.8%, to a record $1.2 billion from $1.1 billion.
The company continues to shift away from selling software as a one-time purchase and toward a subscription model. It now gets 72% of its revenue from recurring sources, compared to 55% a year ago.
In the latest quarter, Adobe added 639,000 Creative Cloud subscribers (net of cancellations), up 38% from a year earlier. This service now has a total of 4.6 million users. Adobe is also seeing strong demand for its newer cloud-based offerings, such as Document Cloud, which lets users create, manage and sign online documents for a $15-a-month fee.
The company spends a high 18% of its revenue on research, which helps it compete in its rapidly changing industry. However, the stock now trades at an expensive 40.0 times the $2.05 a share Adobe will likely earn in all of fiscal 2015. Moreover, that earnings estimate could suffer if the U.S. dollar keeps strengthening; overseas customers supply over 40% of Adobe’s revenue.
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