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Ishan Majumdar
Ishan Majumdar
Articles (105)  | Author's Website |

Adobe: A Resilient Software Giant

The design software behemoth's business model is highly resilient, even to Covid-19

April 08, 2020 | About:

Adobe Inc. (NASDAQ:ADBE) is one of the most financially robust SaaS companies that has a monopolistic position within the niche of design software and has been consistently growing at more than 20% for the past few years.

The company has announced some promising strategic alliances, and its business model is highly resilient to the effects of the Covid-19 pandemic, but the stock has witnessed a fall due to the general selloff across U.S. indices. In my view, Adobe continues to have a bright outlook for the coming years and appears to be a good value investment.

Company overview

Adobe Inc., formerly Adobe Systems Incorporated, is a software company that provides content creation, document management, digital marketing and advertising software and services to the industry of creative professionals and marketers, knowledge workers, application developers, enterprises and consumers. The purpose of its offerings is to ease the process of content creation, content management, measurement and optimization of audience engagement for these industries.

Some of its key products include Photoshop, Flash, Illustrator, InDesign, Acrobat, Dreamweaver and Fireworks. The company’s flagship product is Creative Cloud, a subscription service that allows customer to download and access the latest versions of all the previously mentioned creative products which serve traditional content creators, web application developers, digital media professionals, agencies, companies and publishers.

Adobe has a separate Digital Experience segment which provides solutions and services for how digital advertising and marketing are created, managed, executed, measured and optimized. The company has about 22,634 employees and is headquartered in San Jose, California.

Robust model

Adobe has been in a highly monopolistic position with its suite of some of the best content creation and visual editing software that has become a requirement for almost every professional within the content creation industry. The company’s products are among the best image editing and video creation tools, and their necessity is so high across the industry that educational courses have been designed to provide specialized training in Adobe software packages. Most design graduates entering the job market across the globe have the ability to use all these products, and this fact in itself shows the remarkably dominant position of the company and the incredible stickiness of its products.

Adobe has wonderfully blended its content creation tools with the provision of analytical insights related to user demographics and engagement statistics for content consumption. This has become a solution for application developers all over the world. The company’s relevant acquisitions in this regard include the likes of Omniture and Magento, which have helped the business to lay a solid foundation to equip web developers with the ability to carry out behavioral targeting and web analytics that provide solid audience insights.

The increasing data speeds provided by mobile networks as well as broadband connections, the increasing speed and processing capabilities of computing and the market wide trends of content monetization via digital advertising have are responsible for a strong demand for Adobe’s offerings. Given that it is the undisputed leader in its space, its position will not likely be budging over the coming years.

The Covid-19 pandemic has caused global markets to crash, and Adobe has been no exception to this, but it is unlikely that the company’s business will be significantly affected. There might be a near term hit to the advertising demand of some badly hit sectors such as airlines and hospitality, but this will be only for a couple of quarters before it surges back again.

New alliances

Over the past few months, Adobe has established some promising alliances with giants such as HP Inc. (HPQ), Twitter (TWTR) and the New York Times, which could pave the way for the future growth of the company.

The collaboration between HP and Adobe is titled Project Captis, which has been established with the goal of developing and delivering an end-to-end product that can transform physical materials into digital 3D materials, equipping users with workflow efficiency gains while helping reduce time and costs. Project Captis will use Adobe Substance Alchemist and the Z technology by HP to uplift creative workflows for the customers of both companies. Creators working in 3D and visual effects require photorealism and color accuracy. Project Captis will help create a workflow that brings creators real-world material capture in a new way. The biggest beneficiaries of Project Captis would include industries such as game development, e-commerce, architecture and fashion.

The other big collaboration that Adobe announced was the Content Authenticity Initiative, for which it is parterning with the New York Times and Twitter. It is aimed at developing an industry standard for digital content attribution. The company looks to develop a long-term solution with the ability to provide proper content attribution for creators and publishers in order to ensure trust and transparency online. The move is the first step as a part of a larger goal of technology and media companies across the globe coming together to empower consumers to better evaluate and understand content online.

Key takeaways

In my view, Adobe's stock trades at an attractively low price that is more than 20% below the 52-week high for a company that is known to make new highs with every passing year. Adobe has a strong margin profile, a promising partnership with HP for 3D design, solid new launches across different operating systems and a subscription-based business model which adds excellent stability to the business.

While the company doesn't pay a dividend, its margin expansion story over the years has been incredible, and I think Covid-19 will do little to dampen the growth of this company. In fact, this is the reason why many analysts have actually upgraded the stock since the beginning of 2020.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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