Another quarter goes into the books, and not much is different over at Adobe (Nasdaq:ADBE). While Adobe continues to chug along and produce cash flow, there's not much outperformance on the top line. Consequently, while fundamentals-oriented investors will likely see some value in these shares, the process of unlocking that value could take a lot of patience.
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Respectable Second Quarter Results
Adobe's fiscal second quarter results were good, but they weren't much better than expected and it's that delta between expectation and reality that so often drives these tech stocks.

Revenue rose about 10%, with digital media up 9% and digital marketing up 17%. Also, it looks like Adobe saw more Cloud subscribers than the sell-side had modeled, which is good for long-term revenue and cash flow, but it does cannibalize some of the near-term revenue.

Margins more or less stayed static, as operating income (GAAP) rose about 10% as well for the quarter.

SEE: Zooming In On Net Operating Income

Trimmed Guidance Will Thump the Stock
Although Adobe did post a slight beat for the fiscal second quarter, and management does have a bit of a reputation for conservatism and minor beats, investors are not going to like that the company revised its guidance for the next quarter.

At least some of the revision appears to be driven by conditions in Europe, where Adobe gets about one-third of its revenue. The revision was minor - taking the top end of the revenue range down by $40 million and the earnings per share by 4 cents - but it was still a negative revision and the Street has had its doubts for a while now about Adobe's growth potential.

Still Struggling for Acceptance?
A large part of the problem with Adobe's stock is the skepticism around the company's ability to successfully migrate to the next era of digital content and media generation. Creative Suite and Photoshop and the like are still great, but the company hasn't been able to establish the same sort of dominance for Flash and it's worth asking how much growth potential still exists for Photoshop.

Apple (Nasdaq:AAPL) is notoriously anti-Flash, seeing it as unstable and vulnerable to hacking. That has forced Adobe to find new ways to try to participate in the iPhone and iPad revolution. At the same time, Google (Nasdaq:GOOG), Facebook (NYSE:FB) and Microsoft (Nasdaq:MSFT) all favor the HTML5 standard, and companies like Microsoft and Oracle (Nasdaq:ORCL) are pushing their own alternatives (Silverlight and JavaFX, respectively).

SEE: Which Is Better: Dominance Or Innovation

The Bottom Line
Digital marketing still holds meaningful potential for Adobe, particularly as companies like Google, Microsoft and IBM (NYSE:IBM) are trying to grow in many disparate directions at once. And I do think it would be a mistake to write off platforms like Flash, as it is popular with social gaming developers. The question is whether Adobe can push up the growth rates to a point where Wall Street will really care about the stock again.

Adobe was cheap last quarter, it's cheap now and it will probably be cheap next quarter too. Tech stocks just don't trade on the basis of what a discounted cash flow analysis suggests they ought to be worth. On a long-term basis, a lot of this value does show up in the stock so it comes down to a question of patience - investors who are willing to wait can find value here, but it's hard to push Adobe stock when there are so many other sectors where investors are more inclined to appreciate the value of a solid cash flow stream.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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Tickers in this Article: ADBE, MSFT, AAPL, GOOG, ORCL

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