Adobe- the golden boy of the subscription model
Adobe’s focus on innovation is clear: even during the turbulent times, the company increased research and development spending to $1,630 Billion in 2020 vs 1,430 Billion in 2019.
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Valdas S. London based head of technology during the day, writer at night. Valdas writes about finance, economy, and technology.
2020-11-02 08:10

Intro

Adobe Inc (NASDAQ: ADBE), the company famous for its photo and video editing software was one of the early adopters of the subscription-based model. Initially heavily criticized by its clients, the company stuck to what nowadays is the industry’s standard when it comes to software licencing.

Adobe continues its foray into the world of digital, where it covers marketing, photo and video editing, content management, and business website management, among many others.

In recent years, the king of digital showed a strong performance and continued to deliver enhanced product offerings. Can it remain on the growth path, or will the more recent market entrants attempt to capture the throne?

Current Situation

This year, Adobe, like many other leading technology companies, managed to ride on a wave, even though 2020 will be remembered as one the most challenging years for businesses in modern history.

For nine-month ending August 28th, 2020, the company recorded $7,308 Billion revenue vs 8,699 in 2019. Majority of the growth came from its core subscription business, while product revenues continue to decline.  The decline of product revenue shouldn’t be surprising to anyone, as the company continues to focus on subscriptions, instead of one-off product sales that were more common in the previous decade.

Adobe’s focus on innovation is clear: even during the turbulent times, the company increased research and development spending to $1,630 Billion in 2020 vs 1,430 Billion in 2019.

The company also doubled its short-term investments from $373 Million in 2019 to $764 million in 2020—these including asset-backed securities, corporate debt securities, and municipal securities.

Prognosis

In 2020, revenue breakdown by region remained unchanged when compared to 2019, which indicates equal growth in all areas, despite varying economic situation in those regions.

The company will continue to be in a stable position, where competitors for its core products remain niche or non-existent.

The attempts to dethrone Adobe’s crown jewel- Photoshop, so far have been minimal. The market offers plenty of alternatives, including free to use Gimp- open-source software attempting to be a cost-effective alternative.

However, critics often underestimate the benefits of Adobe’s ecosystem, where product pricing is only a small piece of the entire picture. Many professionals have been using Adobe’s products for years, and often they are the only ones they would ever use in their career. Their software skills are all about Adobe. Secondly, the invisible side of any studio, even if it’s a one-man band, is the infrastructure: file storage, additional software plugins, cooperation and content distribution are the parts that any new challenger would have to get right.

Summary

Adobe will remain one of the safest investments in the upcoming years.  It doesn’t mean, however, that there will be no challenges in the road ahead. The company has already started seeing a trend of lengthening sales cycles, which will most likely continue in 2021. The decision-makers are getting less optimistic and more conservative; therefore if a deal used to take a month to close, now it may take two or more moths.


Disclaimer: I have no positions in any of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. All information should be independently verified and should not be relied upon for purposes of transacting securities or other investments. See terms for more info.

Published On
2020-11-02 08:10

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About the Author
Valdas S. London based head of technology during the day, writer at night. Valdas writes about finance, economy, and technology.



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