Stock Report – Adobe Inc.

Adobe Inc: The original Nasdaq growth stock

Almost forty years ago, Adobe Inc. started as a computer programming language developer. In subsequent years, the company shifted its focus to digital fonts, before then creating the graphics editing program we’ve all become familiar with today, Photoshop.

Before Photoshop was released, however, the company went public on the Nasdaq under the ticker ADBE. Since then, it’s become one of the most successful high growth tech stocks of all time, going from speculative minnow to category world leader and seeing its stock swell 2500-fold since listing. Even to this day, the stock has shown no signs of slowing down. Its track record is significantly ahead of stocks like Amazon (AMZN) and Apple (APPL), yet Adobe receives only a fraction of the publicity.

So what is it that continues to underpin the growth of this high-quality business?

An entrenched position at the forefront of new trends

Adobe’s ability to set the scene for future trends has never been by accident. The company has always had a focus on digital workflow and the digital economy at large. It commercialised a duo of products in Photoshop and Acrobat, which have become a staple in the workplace as they gained unprecedented traction and changed the way we work.

Then there are the other specialised programs like Illustrator and InDesign, which have rounded out the company’s offering. Now, Adobe enjoys what is effectively a
monopolistic position within the creative industry. As the main player, little has and still stands in the way of the company’s growth, which is reflected in its rising stock price. No competitor has managed to come close to offering creative users the broad application and utility that Adobe has with its products.

What has been paramount to this journey, and even more so the future direction of the company, is how digitised every business now is. From your small local grocer to social media influencers, and even large conglomerates, a creative ‘story’ helps sell everything. And this is where Adobe remains best positioned to leverage its suite of products and vast reputation to drive revenue growth.

Volume and scale that takes precedence

One of Adobe’s strongest tailwinds is its subscription model that has evolved in recent years. The company no longer relies on a software sales licensing model. Instead, there is a monthly subscription to the Adobe Creative Cloud, which involves a lower upfront cost for customers.

Furthermore, all-in-one design and creative suite have streamlined things for users. There is now broadened product appeal across different user groups. Functionality issues, like updates, are seamless. On top of that, Adobe requires less effort and costs to market the product, while there is no need for a hard sell to upgrade software, as opposed to renewing one’s subscription.

With the above changes, recurring (subscription) revenue now accounts for over 90% of all revenue. There are few better signs when it comes to the predictability and sustainability of a business’ operations, in addition to providing a strong platform for future growth. This was evident in the company’s March report, with a record quarter showing 25% year-on-year revenue growth, strong cash flow, gross margins of 86% of sales, and an upgraded full-year earnings forecast.

Supplementary growth from expansion

Adobe’s huge scale and position in the market affords it sizeable volume. However, while the software developer has well-established sales penetration outside America, this is one area earmarked for future growth courtesy of scale and adoption. Regions like Europe and Asia are key target markets to boost future revenue.

Beyond organic growth, Adobe has also been attuned to expansion and acquisition opportunities. Last year, it splashed out US$6.3bn to acquire Marketo and Magento – two companies in the high-growth Software-as-a-Service sector – which will round out its offering even further and provide another line of income sources.

No one can fault the level of execution shown by management in meeting the company’s business strategy. At every step, Adobe has responded to change and implemented the necessary measures to grow. In turn, the stock price has followed this ascent. Both the digital media (Creative Cloud, Document Cloud) and digital experience segments of the business continue to outperform, and the emphasis on engagement has been key to customer retention.

History has every reason to repeat itself

All in all, Adobe has proven itself to be a fundamentally sound stock that has enjoyed a phenomenal run over the short, medium and long term. It owns the markets in which it operates so convincingly, few would be able to name a competitor. Furthermore, Adobe’s products have become embedded in our everyday vernacular.

Management has consistently met targets time and time again. Not only adapting to a digitised economy but landing impressive growth and now retaining that via a subscription model. On metrics like Price-to-Sales, ADBE commands a premium to peers like Salesforce (CRM) and Oracle (OCRL), but it has the competitive positioning to warrant this.

The next step in the company’s journey is supported by its unrivalled brand image, superior user experience, foreign market penetration, as well as acquisition and integration of new products and services. By virtue, it is little wonder customers sign up and stay with Adobe. This is one high-quality business with the impetus to see its stock price keep surging in the years to come.

If you’d like to learn more about my investment philosophy, please contact me below to arrange a time for us to chat.

Yours Faithfully,