Adobe (ADBE) stock recently made it back up to its year-2000 highs. It is not a cheap stock; its PE ratio is about 47. But it is in an enviable position. It has virtually a monopoly in its chosen field of graphics development software for professionals.
Almost all professional graphics designers prefer Adobe Photoshop. While free and lower-cost photo-manipultion programs abound, they are used almost exclusively by amateurs. While any file format, such as Microsoft Word, can be posted in a web link, some how Adobe made the PDF/Acrobat file format the ubiquitous alternative to HTML pages. Now Flash is becoming the favorite for posting Web videos.
My regular web pages at Openicon.com are laid out in Dreamweaver, created by Macromedia but now a part of the Adobe empire. At the low end competitors, including Microsoft, basically have to give away programs to compete with Abobe. Once people get to a point where they are willing to pay for professional software, Adobe goes to the cash register.
I think Microsoft's Silverlight initiative is very intersting, but it is no immediate threat to Adobe.
This year Adobe is in a product renewal cycle. Professionals everywhere will groan as they are milked for their upgrade money, but they have learned through bitter experience they have no choice. They must pay for the upgrades or fall behind their peers.
Management, of course, is proud of itself and feels it is doing fine. The new products will be great and sell. To get last quarters results and insight from management you can read my summary of the March 20, 2007 analyst conference.
This week Adobe launched a public Beta of ColdFusion 8 Software. This is more esoteric than Photoshop. It allows software teams to build dynamic Web sites. It even supports sites requiring integration with Microsoft .NET products and enterprise Java.
A full Version 8 of Acrobat 3D was also released. This allows professional CAD/CAM designers to share designs, including over the Internet.
Creative Suite 3 has been introduced and will be the big money generator for most of 2007. Depending on which version you buy, it includes such products like Photoshop, Illustrator, Flash, Dreamweaver, or Acrobat.
With design for Internet, including Internet video, still being a growth area, Adobe's revenues and profits are almost certain to continue to grow over the next few years. That said, 2006 revenues were $2.58 billion. There was a bit of an end-of-year pause as some customers delayed purchases until the new products were released. And because of development costs, net income in 2006 was down from 2005. Expect it to be up again in 2007.
Adobe is not a bargain stock, but it is one that is highly likely to pay off in the long run. The company has $2.3 billion in cash in the bank, too. With low risk and high long-term potential, this is a good stock for certain types of portfolios.
I don't own the stock.
My Adobe (ADBE) page
Adobe corporate web site