The reaction to earnings at Adobe (NASDAQ:ADBE) offered more proof that cloud applications are kings of this stock market.
Adobe, which moved its picture and video editors to the cloud early this decade, earned $632 million, $1.30 per share, on revenue of $2.744 billion during the three months ending in May. The earnings were 5 cents short of a year ago, well short of analyst estimates, but revenue was 25% ahead. Guidance was considered soft.
But Adobe stock took off anyway, rising almost $17.50 per share over the next 24 hours, opening for trade June 20 at $294 per share. This added about $7 billion to the market cap, which stood at $142 billion. Adobe is up almost 29% in 2019 and over 300% over the last five years.
Pretty good for what is, by Silicon Valley standards, a mature company.
The Marketing Cloud
Adobe was founded in 1982 around PostScript, a page description language, and during the rest of the 20th century it grew by acquiring other, related products for pictures and video. By the middle of the 2000s, however, it was languishing.
Then CEO Shantanu Narayen committed the company to the cloud.
Not only did Adobe find new profits by hosting its software online, but Adobe found new markets. In addition to its Creative Cloud, where you’ll find most of its older software, its star product is now its marketing software, called Adobe Experience Cloud, designed to help create, and measure, online and offline marketing efforts.
The result has been what TV analyst Jim Cramer calls the “golden age of creativity,” with websites crushing brick-and-mortar retailers. This doesn’t just help big retailers, but smaller ones like Rite Aid (NASDAQ:RAD), which is using Adobe to pull data from multiple sources and help pharmacists get treatments right with improved patient compliance.
Along the way, Adobe has increasingly collided with Salesforce (NASDAQ:CRM) as both seek to become customers’ Data Management Platform of choice for sales and marketing. So far there seems to be plenty of room for both. The losers are stores that don’t use these new tools and vendors of older tools like Oracle (NASDAQ:ORCL), which are now being bypassed.
Having creative and marketing applications in the cloud not only improves Adobe’s own time to market, it lets all its customers stay on top of the latest trends in Web marketing and the fight against fraud.
When Adobe learns how to detect faces that have been edited online, all its customers can too. When its new Apple (NASDAQ:AAPL) iPad software for artists, now called Fresco, is ready for launch, all its customers will get it at once.
Narayen’s key decision wasn’t just to commit to cloud, but to partner with Microsoft (NASDAQ:MSFT) and its Azure cloud. The two companies are increasingly connected, with seamless integration between Adobe’s cloud and Microsoft Office applications.
This will inevitably lead some to talk of a merger, but don’t expect one. Microsoft has learned, from its antitrust experience 20 years ago, not to consume the markets it creates. Close partnerships give it the dominance it craves without the risk of government interference.
The Bottom Line on Adobe Stock
As cloud applications become the norm, ADBE has a clear field ahead of it. The only thing keeping it off some analyst buy lists is its valuation, well over 10 times sales and 54 times earnings.
But in a hot market you don’t get a diamond by buying zirconium, and ADBE stock skeptics are falling in line.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT and AAPL.