When we talk about the giants from the personal computer era, there are certain companies that come to mind. Microsoft (NASDAQ:MSFT). Intel (NASDAQ:INTC). Apple (NASDAQ:AAPL). There’s another that belongs on that list that’s been a huge winner for investors — Adobe (NASDAQ:ADBE) stock.
Adobe helped to kickstart the desktop publishing revolution, and its software dominates the creative sector. Since the company began to transition from selling boxed software to monthly subscriptions, ADBE stock has been on fire.
Here’s why this A-rated stock deserves a spot in your portfolio.
The Genius Move to Subscription Software
For the first 25 years of its existence, Adobe sold its popular creative software like Photoshop, in a box. Customers bought a copy and kept it. They could continue to use it as long as they wished, but to get the latest features they would be forced to upgrade. The money was good — a copy of Photoshop 1.0 for the Mac retailed for $895 in 1990.
In 2012, the company began a move that would completely shake up its business model. It launched Creative Cloud, a monthly subscription service. Access to a bundle of Adobe’s most popular software could be had for $50 per month. That move has had a dramatic effect on the company’s business.
The subscription model eliminated sales cycles, making revenue forecasting much easier. It eliminated the issue of owners waiting years to upgrade. And the low monthly price meant that Adobe’s content creation and editing tools became affordable to a much wider range of users. Creative Cloud customers aren’t just professional marketing companies with big budgets, they include small shops, students and hobbyists.
Ultimately, the combination of volume and monthly billing resulted in increased revenue, even after giving up those $895 purchases. In the first quarter of this year, digital media revenue for Adobe was $2.2 billion, up 22% year-over-year.
Since the changeover to subscriptions began in 2012, ADBE stock is up 1,163%.
Other companies have also become subscription converts. Last year, Microsoft actually released an ad campaign attacking its own Office 2019 boxed software in an effort to convince consumers and businesses to switch to an Office 365 subscription instead.
Another of Adobe’s big moves has also turned out to be prescient.
In 2009, Adobe spent $1.8 billion to acquire Omniture, a company specializing in web analytics. That acquisition turned into the foundation of Adobe Analytics. This tool has become incredibly popular for tracking online engagement and sales. You’ll frequently see data published by Adobe quoted in relationship to big online shopping events like Black Friday or Cyber Monday. And yes, Adobe offers subscriptions to its Analytics tools to corporate customers.
The acquisitions aimed at bolstering its presence outside of creative tools has continued. Its largest acquisition ever was its $4.75 billion purchase of marketing automation firm Marketo in 2018. Also that year, Adobe snapped up Magento Commerce for $1.68 billion.
As a result of these investments, the company’s Digital Experience division posted Q1 revenue of $858 million this year, a healthy 15% YOY increase.
The Bottom Line on ADBE Stock
Adobe will be releasing second-quarter earnings after the market closes today. With a lengthy streak of beating analyst estimates, the odds are good that the company will do so again today.
A decade ago, a crisis like the novel coronavirus would have left creative professionals questioning whether to shell out hundreds or thousands of dollars on new versions of Adobe software. Many would simply make do with their existing version. Adobe revenue would most certainly have taken a devastating hit.
The story is very different now. Even in a pandemic, few users will consider canceling their subscription to save the modest monthly fee — which would also mean losing access to the software.
The subscription model comes to the rescue again.
Adobe Analytics, which has become an invaluable tool for measuring online engagement, trends and sales, is in the spotlight. With months of store closures and consumers buying online, the data tracked by Adobe is critical. And this business just keeps growing.
Regardless of what Adobe reports today, ADBE stock remains a top pick. This is a company whose stock has increased in value by 1,163% since it launched its Creative Cloud subscription service. And in 2020 — a year that has been unkind to many stocks — Adobe shares have already increased in value by nearly 20%. That performance speaks volumes.
Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.