NEW YORK  - Adobe Systems is paying a princely sum to add to its virtual realm. Graphics design and video production may be the $120 billion software juggernaut’s crown jewels, but Adobe wants to expand its business of helping companies go digital. Magento Commerce could be key to unlocking faster growth. Yet at $1.7 billion, or 11 times trailing sales, it’s a stiff price.

Adobe’s business has performed well over the past five years. The digital world’s expansion has meant voracious demand for its software for creating and manipulating images and video. Those activities account for about 70 percent of revenue, and are growing more than 25 percent annually. Existing subscribers tend to buy more products. Add new users, price increases, and perhaps success in getting pirated users to pay, and growth should continue for years.

Shares of the company led by Chief Executive Shantanu Narayen have been on a corresponding tear – rising more than fivefold over the past half-decade. With Adobe valued at over 11 times forecast sales over the next twelve months, expectations are heady.

One way to justify the multiple attached to Adobe is the potential of its software for selling stuff digitally. Adobe helped create the online world of images, so it might as well cash in on the rising commercialization of it. That’s why the company has acquired analytics and online-marketing software firms over the years. Magento theoretically is the key linking the virtual and real, assisting companies who want to set up online shops and figure out payments, tax and shipping.

Adobe faces tough competition, with Salesforce.com, SAP and others already jostling for supremacy in this fiefdom. That’s one reason why Adobe’s revenue in the area is expanding more slowly than creative imaging, at around 15 percent or so per year.

Scant financial details make it hard to figure out how optimistic Adobe’s purchase price may be. Salesforce bought Demandware, a Magento rival, in 2016 for a similar valuation. Since it’s not clear how fast Magento is expanding, this comparison has limited value.

An expanded empire may be strategically sensible and have appeal for Adobe’s managers and investors alike. The danger of going adventuring, however, is the company may neglect its rich home turf.

CONTEXT NEWS

- Adobe Systems said on May 21 that it had agreed to buy Magento Commerce for $1.7 billion. Private-equity firm Permira currently owns Magento, which helps companies build online stores, after buying it from eBay in 2015.

- Magento had about $150 million of sales in 2017.

- Adobe also announced that its board of directors had authorized the company to buy back $8 billion of stock.

(Editing by Rob Cox and Martin Langfield)

© Reuters News 2018