The chief benefits of open source go to the users. The cloud is a product of open source. I’ve been writing those two sentences, repeatedly, for over a decade now, and they’re as true today as they ever were. Companies that fully embraced the economics of cloud have ridden it to glory.
Few have done so as spectacularly as Adobe Systems (NASDAQ:ADBE). By the standards of Silicon Valley it’s old money, founded in 1982, its squat skyscraper a few blocks from the San Jose convention center.
John Warnock and Charles Geschke founded Adobe around PC tools like PostScript and Photoshop. Shantanu Narayen re-invented the company by embracing the cloud and subscription as a service. Over the last five years the stock is up 342%, even with the recent tech wreck taking 13% out of the price.
Clear Sailing
Adobe said Oct. 15 it expects top-line growth of 20% next year, to $10.8 billion, well above previous analyst estimates, and the stock rose almost 6% in response.
Both the recent fall and this rise are unsurprising. Even at its October 15 close of $238, Adobe was selling at an eye-popping 49 times earnings. The October 16 gains will send that even higher. But when you’ve got Amazon.Com (NASDAQ:AMZN)-like growth it seems justified. Adobe had $5.8 billion in revenue as recently as 2016.
It’s all about selling Adobe’s software as a service, then expanding on that base. This is precisely what Salesforce.Com (NASDAQ:CRM) has been doing, up in San Francisco, and increasingly the two companies are on a collision course. Adobe last month bought Marketo, a marketing automation company, for $4.7 billion, which it will put together with Magento, bought for $1.6 billion, as part of its Adobe Experience Cloud.
The Experience cloud offers marketing tools that work while someone is on your Web site. It gives modern e-commerce the insight of a company’s customer relationship stack, and points visitors down the sales funnel based on that data. It turns pretty pictures into sales.
Customer relationship management is Salesforce’s game, however, so expect more scrums among Salesforce, Adobe, and Microsoft (NASDAQ:MSFT), along with SAP SE (NYSE:SAP) and Oracle (NASDAQ:ORCL). Adobe has an advantage because it’s coming to the game from inside the virtual sales floor. Adobe graphics tools are what make those sales floors pop.
Living with the Past
Adobe stock’s problems, such as they are, are mainly about its past.
Specifically they involve Flash, its video player from the 1990s that it has said it will sunset in 2020 and no longer updates.
Browser makers like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have responded by backing away from Flash, but it’s still there, hiding on many PCs.
Hackers have discovered this and created “updates,” often using Adobe’s trade dress, containing malware, often cryptocurrency mining software. It’s distributed computing, one of the technologies that built the cloud, but gone rogue.
For those gray hairs, like me, who remember when Flash meant multimedia, multimedia meant something, and for whom SETI@Home was a thing, it’s both maddening and a little sad.
For Adobe stock, however, it’s all a distraction, and that’s what investors need to know.
The Bottom Line for Adobe Stock
Like all tech stocks, Adobe is subject to trends within the market and larger economy, hence its recent fall. But Narayen has made Adobe great again, by embracing cloud economics and subscription revenue, then expanding from the graphics niche into marketing and developing intimacy with customers.
So, when Adobe falls, as it did recently, young investors need to grab it like it’s on sale. Because it is. But those low prices won’t last. Buy now.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
