Adobe is a successful company in a high growth market. We analyze the main variables to take into account when analyzing a position in Adobe shares in the medium term.
Adobe (ADBE) is the world leader in content creation software thanks to its dominant position with products such as Photoshop and Illustrator. Over the years, the company has incorporated new services and applications, and the purchase of Omniture represented a strong entry into the digital marketing business.
The revenue of the company reached $2.6B dollars in the first quarter of 2019, growing 25% year-on-year and surpassing analysts’ forecasts by $2.54B million dollars. Adjusted earnings per share amounted to $1.71 per unit in the period, exceeding Wall Street expectations by 9 cents per share.
The business model is highly profitable, the gross profit margin is 86% on sales, and the operating profit margin is at levels of 28%.
In recent years many software companies have modified their business model. They no longer focus on the sale of software as a product that is purchased occasionally, but on offering the software as a service for which the customer pays a monthly or annual subscription. Adobe has been one of the pioneers in this transformation, and this decision has benefited both customers and shareholders in the company.
Entry costs are significantly lower for customers. An Adobe software package purchased as a product could cost more than $ 1,000, while a monthly subscription to Adobe solutions costs about $ 10 per month. This logically makes Adobe’s solutions much more accessible to customers.
Another fundamental advantage is that by accessing Adobe’s online solutions, they receive access to permanently updated software, and can also incorporate new applications and services with great ease.
From the point of view of the company, the business model based on software as services has the great advantage of fighting software piracy. In addition, billing from subscriptions is much more stable and predictable than when the software is sold as a product.
The transition from the software model as a product to software as a service tends to imply a transitory drop in sales, since service revenues are distributed over the long term while software sales present income of short-term term. Fortunately for shareholders, Adobe has already left the transition phase in the past, and business numbers show healthy sales growth.