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Adobe Systems Incorporated (ADBE) Stock’s Cloud Payoff is Already Here

Adobe analysts are expecting big things in Thursday's earnings report

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As Adobe Systems Incorporated (NASDAQ:ADBE) prepares to report results on Dec. 15, its executives are enjoying a merry Christmas from investors.

The company’s heavy investment in cloud and subscription revenue, driven by CEO Shantanu Narayen, is paying off big-time. Revenues are up 20% year-over-year, and net income is up 55%. Profits have more than doubled from where they were in 2013 and 2014, while investments in the cloud transition were being made.

Seasonality from purchases of its graphics and creative software has disappeared, replaced by regular subscription renewals of its “Creative Cloud.” Everything is running like clockwork in downtown San Jose, where the company has its offices.

But for new investors, that’s a problem. The good news is already priced into the stock, which trades at a cloud-like price-to-earnings multiple of 54 and pays no dividend. In a market that will be struggling to tread water in 2017, what is the value in reaching for Adobe?

Naruyen Cleared the Decks for Adobe Stock

Before Naruyen bit the bullet on cloud, Adobe was in serious trouble.

Everyone knew Adobe’s Flash player was vulnerable to hack attack and browsers are now dropping support for it. Even Adobe itself now supports the competing HTML5 standard. The switch of Google Chrome to HTML5 is just the last nail in the coffin.

Today, such news can slide off ADBE stock like water off a duck’s back. Adobe’s Creative Cloud is winning massive contracts, and new versions of Photoshop for client devices are getting strong reviews. The entire product line is being re-focused on getting files from and saving files to the Creative Cloud.

Once Adobe stock became fully invested in the cloud, it could create solutions to problems companies had previously not acknowledged. One example, introduced this fall, is the Sensei network for managing images, using artificial intelligence and machine learning to figure out what images users want and get them quickly.

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