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It seems that no matter what software giant Adobe (ADBE) does these days to appease Wall Street, it has become quite apparent that it will never get the respect that it once had from analysts. As an outsider looking in, I grapple with the question, does it deserve any?

The king of flash has had its better days, there is no disputing that. But remarkably, for as talented of a management team that it has, it just seems to me that they have not been able to adequately pinpoint the solution for what has held the company back over the years. But to be fair, I have to give it an "A for effort" because there is plenty of evidence that the company continues to leave no stone unturned in trying to regain its dominant form. But I have reason to suspect that its luck will soon change.

Proving its Value

The biggest challenge for Adobe at the moment is trying to convince investors that it is still relevant and can regain its dominant brand. But for investors to be convinced, the company has to be able to demonstrate sufficiently that it can produce the very thing that all investors crave, which is growth. What makes this a bit more puzzling is that Adobe is still dominant in its core popular Creative Suite of programs - titles which include Photoshop, Pagemaker as well as the web design software of choice for developers, Dreamweaver. And of course who can forget Acrobat Reader and its flagship Flash plug-in.

So with such industry standard acceptance of its products one would imagine that Adobe is doing pretty well. So what is the problem? That question is a bit more complicated, but one does not have to look too far to see that Apple (AAPL) has yet to adopt to its products in neither iPhones or iPads - and all of this while PC sales are slowing down. And then there is Google (GOOG) which offers several Adobe-type products for free through its Google Apps and Docs platform.

So what can the company do to sustain growth outside of giving away its products? Will it partner with another software giant such as Microsoft (MSFT) to leverage its existing PC advantage since they both have a common enemy in Apple? This is one possible solution and it can get creative? After all it has built its brand around creativity.

The Quarter That Was

In its most recent quarter the company showed that it is not doing as badly as some might think. The company reported revenue that increased 2% from the previous year - numbers that, (for the most part) arrived as expected. It did however report declines in both its digital marketing revenue as well as digital media - down 4% and 12% respectively on a sequential basis. I suppose one way to look at this is that it is improving and struggling in these areas as one (marketing) performed much better than expected, while its media products went the other way. It showed a drop of 4% in operating income from the same period a year ago - which was a slight concern. But this number also represented an increase of 17% from the previous quarter.

So I have to say that the company is certainly showing signs of improvement. And depending on the type of investor that you are - whether glass-half-full vs. half-empty - there is a multitude of ways to look at its report. Its earnings were fair - at least to me. But does it inspire growth? And more than anything this is the question that I was hoping it would help answer. From an investment standpoint there are indeed some possible catalysts to send its shares moderately higher than where they are today.

One possible cause for excitement is its soon to be released sixth iteration of its popular Creative Suite or CS6. This is in addition to the fact that the company is in the process of adjusting its business model from the conventional software box sale to a subscription model, a transition similar to what Microsoft has recently adopted with Office 365. It is still too early to see how this transition will unfold and what benefits (if any) are presented. One thing for certain is that Adobe will do what it can to get new customers to adopt the subscription platform by possibly lowering its prices.

But while it may secure a few more customers, its impact on margins can't go ignored. Plus it runs the risk of enticing its existing customers to migrate over to the less expensive option. But then again, I'm certain that it has evaluated all of these risks. But as its recent earnings demonstrated, the company still has plenty of opportunities to grow if it can focus on what is working - it's digital marketing business.

Summary

For Adobe, growth in any aspect of its business won't be as easy as just focusing on which areas it wants to grow - particularly in its digital marketing as competition in this space is already crowded. Firms such as Oracle (ORCL) and the aforementioned Microsoft and Google are also doing their best to secure ad dollars that are left from companies looking to get their brand out in front of potential customers. But it is hard not to like Adobe at this level because the downside is pretty limited at this point - even though it is now at its 52 week high. A P/E of 22 is a little concerning, but for a tech company its size a high P/E has rare (if ever) mattered.

Source: Adobe: Why It Might Be Time To Buy