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Stock Analyst Update

Macromedia's Long-Term Outlook Remains Bright

But the company has a weak spot: Shockwave.com.

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What Happened?
Web software and multimedia company Macromedia (MACR) reported Wednesday that sales and operating earnings (excluding noncash charges) for the quarter ending September 30 grew 73% and 63%, respectively. Helped by interest from cash investments, pro-forma net income came in at $0.26 per share, beating analysts' estimates of $0.24. Both gross margins and operating income as a percentage of sales declined sequentially from the June quarter.

What It Means for Investors
We think Macromedia's stock is fully valued at its current price of around $70, or 64 times fiscal 2001 earnings as estimated by First Call; however, it still looks good for long-term investors. Software sales, especially of the recently released Flash 5, remain very strong. But while Macromedia's revenue comes mostly from software sales, its Shockwave.com division gets the majority of its revenue from ad sales. Macromedia plans on spinning off this unit, but it's highly unlikely an initial public offering of Shockwave.com will happen in the near future, given the weakness of the IPO market and gyrating prices of ad-based stocks such as Yahoo (YHOO) and DoubleClick (DCLK).

Mark Sellers does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.