The cross-platform plug-in that plays animations, videos and sound in a format called .swf was important in the early years of the Web. It enabled browsers to handle complex files at a time when download speeds were measured in kilobits per second.
Today, with download speeds measured in megabits, the speed improvements are not as important. Flash has instead become a liability, a vector for malware, even ransomware. Many of the largest sites on the Web, including Facebook (NASDAQ:FB), have already stopped supporting it.
The fact that Adobe has now provided an update for the latest Flash emergency is not going to save the technology. Browser companies, including Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL), are reducing their support of it.
The question you, as a shareholder, are probably asking is, if this technology is so important, why is Adobe's stock on the rise? Over the last month, it has gained 11% and in early morning trade Friday, it was up another 50 cents.
The fact is that Web technologies like Flash are no longer what Adobe is about. Adobe is now about its Creative Cloud, which puts all its popular graphics tools under a single license, and delivers them as a service. For Adobe, this means regular subscription income rather than a reliance on product sales and expensive updates.
Creative Cloud has been a huge hit, not only allowing Adobe to grow its top line 30% year over year, but dramatically increase margins at the same time. For the quarter ending March 4, for instance, Adobe reported net income of $254 million, 50 cents per share, on revenue of $1.383 billion. This compared with net income of $85 million, 17 cents per share, on revenue of $1.1 billion a year earlier.
The heavy lifting to get the Creative Cloud running is now done, and so is much of the heavy marketing expense. Now, when Adobe wants to update its software, it does so once, and that update is instantly available to all its customers. "Cloudonomics" like this are a powerful profit driver, once a company gets on the right side of it, and Adobe is now clearly on the right side of it.
The bottom line is Adobe does not need Flash to remain relevant or profitable. Adobe can address its problems with Flash at its leisure, knowing that it is mainly taking a public relations hit from it, not a financial one. Expect that Flash will be deprecated, essentially going away in favor of HTML 5, but don't worry about that.
The bad news is other investors also know this one weird trick, to look for weakness in Adobe stock and pounce. You'll need a wider market fall to get your next shot at buying Adobe, but when it comes, pounce.
Disclosure: I am/we are long GOOGL, MSFT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.