Adobe Systems Corners Its Market
Adobe Systems Corners Its Market
By Hal Plotkin
CNBC.com Silicon Valley Correspondent
Sometimes the best investment ideas can be found right in front of you. Several Internet and Web-publishing analysts say that is the case with Adobe Systems Inc. {ADBE}.
Adobe Systems 52-week stock price
They say it is now virtually impossible for companies to engage in serious publishing activities, either online or offline, without using one or more of Adobe’s popular suite of software-based publishing tools.
There are, of course, literally hundreds of companies that lay claim to having carved out a critical role as leading Internet-infrastructure providers. What is interesting, though, is that those claims are almost always made in documents that are published online with the help of Adobe’s proprietary Acrobat software.
Eugene Munster, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis, has a $95 12-month price target on the stock, which he rates “strong buy.”
“I like the stock a lot,” Munster says. “The market has been pretty ugly and brutal lately, which means people will want to buy the quality stocks. I think you’re going to continue to find Adobe right in the middle of that whenever people are looking for the blue-chip stocks.”
Munster says that you can get a sense of Adobe’s growing prominence simply by visiting the Web sites of virtually any leading Internet-infrastructure provider, securities firm or government agency. It is a stock-research approach drawn straight from Fidelity Investment’s famed guru Peter Lynch, who has often suggested that investors are wise to pay attention to their own senses.
In this case, look for the lengthiest, most-important documents found on information-rich Web sites — say an annual report, for example, or a detailed product catalog.
But don’t read the documents. Instead, just look to see how they are presented. Chances are pretty good you will be looking at an icon for Adobe’s Acrobat software.
That could explain why there have already been more than 200 million downloads of Adobe’s free Acrobat reader, which lets users view and print out copies of documents published online that have the exact same look and feel of their original hard-copy, printed versions.
Although Adobe gives away the software used to read those files, it charges a rather handsome $999 for the package of software that includes the tool needed to produce the documents as part of a package that contains other tools for manipulating graphics, images and text.
“Adobe is a company that has demonstrated how you successfully compete with Microsoft {MSFT},” says Rob Enderle, vice president of the Giga Information Group, based in San Jose, Calif. “They’ve carved out a premium space and have defended it with their users.”
Enderle says Adobe now has preemptive strength in its core markets. “If you do publishing at a professional level, it’s very likely you’re using Adobe,” he adds.
Competitors may try to encroach on those markets, Enderle says, but it is unlikely they will have much luck, given the now ingrained habits of publishers and graphics-arts professionals.
“What’s hard to replace is not just the software,” Enderle says. “It’s the experience and knowledge of the company’s user base who have grown accustomed to the products.”
Knocking Adobe out of its niche as the leading supplier of software for publishers would take a whole lot of doing, Enderle says. The advantages of any competing products would have to be significant enough to justify the considerable costs and hassles that would be involved in making the switch. He says that Adobe’s current lead, combined with the firm’s good reputation for anticipating customer needs, makes it unlikely any new competing products will leapfrog Adobe’s current offerings in the minds of the most-avid users of the company’s products.
The one possible exception, which pertains to Adobe’s Acrobat software, is what might happen if the Internet moves toward more-robust open standards for publishing rich-text documents, which can contain charts, graphs, photos and text. If that happens, Adobe’s Acrobat format might lose some of its current advantages.
“But even if Acrobat disappeared, I don’t think that would hurt Adobe very much,”
Enderle says. “They could easily embrace [the new standard] with one of their other tools. What’s really important is Adobe’s user base, which is basically everyone who does publishing.”
Adobe’s other popular products, Enderle notes, include Photoshop, Illustrator and PageMaker, all of which are wildly popular with publishers.
Munster says he came away from last week’s Adobe analyst meeting even more impressed than he went into it. At the meeting, the company boosted its guidance for fiscal 2001 earnings, in part, by raising its operating-margin target to 32% from 31%. The change led several analysts to increase their fiscal 2001 earnings estimates by several cents to as high as $1.31 a share. Analysts had previously forecast those earnings 5 to 7 cents less.
More importantly, Adobe also sketched out its plan to extend its leadership in desktop publishing to the emerging area it calls “network publishing,” which involves formatting documents so they can be accessed on a wide variety of devices, including personal digital assistants, cell phones and other Web appliances. Adobe’s presentation included a description of the various segments within the network publishing market, which the company sees contributing to what it says will be an overall $12 billion market opportunity by 2004.
“What I really like about this story is not only how well the company is doing today, but how it plays out over the long term,” Munster says. “Over the next 20 years, rich documents are going to be everywhere, on cell phones, PDAs and areas we can’t even begin to conceive of now. I feel very confident Adobe is going to be there every step of the way.”
Jay Vleeschhouwer, an analyst with Merrill Lynch, based in New York, agrees.
He says Adobe has been one of his top stock picks since he initiated coverage last February. He currently has both intermediate and long-term “buy” ratings on the stock, an indication that he thinks it will do well over both the short and long term. His current price target stands at $85.
“Adobe is now in a very strong position to expand and increase its addressable market,” Vleeschhouwer says. “The company is in an excellent position to retain its market-leading position.”
Analysts say last week’s slight dip in Adobe’s shares was more a function of overall market jitters, rather than a reflection of any particular concerns regarding Adobe. They got some validation on that point on Tuesday, when the stock rebounded by more than 10%.
“What you’re seeing is an understanding that this is a company that has executed very well over the last two years and that has multiple strong revenue opportunities,” Vleeschhouwer says.
