I Was Wrong About Adobe

| About: Adobe Systems (ADBE)
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Summary

Adobe has a hit with its Creative Cloud.

Shantanu Narayen has proven himself a top notch executive.

I was wrong to dismiss the future of this Silicon Valley bellweather.

Traders have the right to sneer at me today, as Adobe (NASDAQ:ADBE) is on a tear following earnings.

When I wrote about the company a month ago, the stock was trading at under $72 and essentially treading water. It's up 8.5%, as of late Friday morning, on a strong earnings release and the purchase of Fotolia, a source of royalty-free graphics, for $800 million.

What's really driving optimism about the stock is its "Creative Cloud," an offering of graphics software, in the form of a service, which added 644,000 customers during the quarter. It's a hit, and the Fotolia acquisition is a great bolt-on that will make it even more of a hit.

I wrote that in conventional terms Adobe made a good short. I expected a bumpy transition to offerings like Creative Cloud. In that, I was completely wrong.

What it turned out Adobe had, and which I discounted, was Shantanu Narayen, 50, an Indian-born executive who joined the company back in 1998 and has been acting as CEO since 2007. Narayen is a veteran of both Silicon Graphics and Apple (NASDAQ:AAPL), he co-founded an early picture-sharing site called Pictra and he has been engineering what looks now like a seamless transition from selling software to selling services.

Adobe is, as I wrote a month ago, primarily a recycler of technologies that are often created elsewhere. Macromedia, a video editing company whose heritage includes Macromind, founded by a friend of mine named Marc Canter, is one of the companies that have been recycled. But all the recycling has always had a basic point - graphics - and Adobe has been willing to ride the waves of that technology, down as well as up.

Right now graphics, in all its forms, is on an up swell. Global law enforcement has come down heavily on copyright violations - witness the closing of Pirate Bay - but more important the industry has come up with creative ways for people to actually buy copyrighted material, at an affordable price. With the need to hoard reduced, and with faster broadband speeds creating vast new markets for legal content, graphics software is taking off.

Some of Adobe's older ways of doing business have been hurt. Its relations with other Silicon Valley players, like Apple, have not always been smooth. But engineering a successful transition of the company's tools to cloud is a win, and in the last quarter that win was proven.

I was wrong.

I wrote a month ago that you should "look for an entry point" on this stock, but I was wrong to think the $72 price was a poor one. With the U.S. and digital economies suddenly looking much stronger than before, it's not too late now to make money on Adobe.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.