Adobe Raises Guidance; Time to Buy?

Includes: AAPL, ADBE, MSFT
by: Alexander Wissel

Adobe Systems (NASDAQ:ADBE) put up positive earnings numbers earlier this week, and while the impact was initially muted, the stock has bounced – it’s up just over 5% at the opening bell. But technology has been the early darling of this new bull market and valuations are high.

Is now the right time to be picking up more shares of this technology bellwether?

It shouldn’t have shocked anyone really. Adobe Systems is synonymous for high quality software. Ask anyone who has ever opened an Adobe acrobat file, or viewed an Abobe flash presentation. From individuals to organizations, you would be hard pressed to find one that doesn’t use Adobe products in one shape or another.

And that’s really the point behind this company.

As the meltdown faded, technology and software companies focused on specific products and market niches. The biggest software behemoth, Microsoft (NASDAQ: MSFT), focused on the programs and products of typical businesses: Outlook, Excel, Word.

Adobe’s tack was down the creative path. Creating programs that artists and designers couldn’t live without, they soon dominated their space. Adobe Photoshop, Illustrator and Dreamweaver are still the premiere programs for their markets.

For example, the images in our articles, and the creation of this website were done with the help from Adobe software. But their software hasn’t stopped at the realm of creatives and artists.

As security and web shenanigans have become more apparent, the security enabled by software like Adobe acrobat’s document reader has become greatly appreciated. Readers are unable to change or alter a document unless they have a code.

From insurance companies forms, to loan documents and countless other documents that require a certain level of protection Adobe has been quietly adopted as the software to use. This has given Adobe inroads beyond the arts-based companies.

Adobe’s Tight Control on Its Market

While originally some of the main programs were Apple (NASDAQ: AAPL) based programs, Adobe’s products can run on both Apple and Microsoft platforms.

Adobe keeps a tight lid on its software and the licensing for it. In the same way Apple is infamous for its secrecy over new products, Adobe could be known for its focus on product licenses and updates.

This focus on platform security has given them two main benefits.

One, it’s built a huge moat around the software from also-rans and knockoffs. Competitors simply can’t match the ease of use, the detail and the quality of the programs. It’s led to a domination of schools that teach all sorts of computer arts. Every new graphic design degree that rolls out is going to be trained on Adobe software.

Like Microsoft learned so painfully, when a computer system is in schools, those students will want those products after they leave. In Microsoft’s case, Apple had a huge edge on school coverage until the late 90s.

The second benefit has been to increase Adobe’s desirability – and as a result, its prices. Perhaps it was the early working with Apple that led the principals to a premium product instead of mass market prices. Regardless of whether it was an accidental cause or focused strategy, Adobe products are priced at a premium. Their design and web suites run in the thousands of dollars.

Which is a cost that businesses will pay to use the industry accepted software.

Adobe opened up just over 5% this morning as the market has finally digested the latest earnings reports and surprise expectations increase. But that should scare off long-term investors. We believe that over the next year Adobe still has a strong upside potential with a price target of $47-$50.

There might be some pullback and profit taking from this morning’s bounce, so investors might want to hold back a bit. But not too long – as we see this trend continuing upwards.

Disclosure: This author has no positions in the securities listed above.