This big-name software company has plenty of upside

With a virtual monopoly in content creation and management software, wide-moat Adobe has room to run, says Morningstar's Rodney Nelson.

Rodney Nelson 10 March, 2016 | 6:00PM
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Rodney Nelson: Earlier this year, the software sector suffered a substantial pullback amongst weakening investor appetites for risk and some high-profile earnings misses. However, one of the names that we believe looks attractive as a result of this sell-off is Adobe (ADBE). Adobe's business model has undergone a significant transformation over the last several years, becoming one of the first software companies to force its users to migrate to a cloud-based environment. It has been nearly three years since Adobe went cold turkey on on-premises deployments, and we think the firm is a textbook example of how legacy software vendors can successfully navigate a transition to the cloud.

We award Adobe a wide economic moat rating based on its virtual monopoly in the realm of content creation and management software, driven by its robust Creative Cloud application suite. This suite comprises a number of well-known applications including Photoshop, Lightroom, and InDesign--tools that are vital to design programs and creative minds all around the world. The platform has grown to more than six million subscribers since its launch in 2013, as we believe the subscription model with low monthly payments eliminates a great deal of customer anxiety that once existed around Adobe's licensing model.

The firm also competes in the burgeoning digital-marketing vertical, providing applications around analytics and campaign management to help enterprises gain valuable insights about both their products and customers. While Adobe competes with several heavy hitters in this space, including Oracle (ORCL) and Salesforce.com (CRM), the firm has the largest revenue base in this vertical to date at more than $1.5 billion in fiscal 2015, which we think places Adobe on strong competitive footing.

Looking at valuation, although the stock has rallied more than 20% over the past few weeks, we continue to see more than 15% upside to our fair value estimate.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Adobe Inc512.15 USD1.53Rating
Oracle Corp192.29 USD-0.07Rating
Salesforce Inc342.02 USD1.86Rating

About Author

Rodney Nelson

Rodney Nelson  Rodney Nelson is a senior equity analyst for Morningstar.

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