In any given quarter, Adobe can either be hurt or helped by the latest developments at Apple. This time it was helped. Over the next 5 quarters, it will probably be helped maybe once and hurt maybe thrice. This is because the graphics industry tends to freeze up its software purchases whenever Apple goes into spasms.
But the real strategic opportunity for Adobe is not the graphics market. It is enterprise document management. This enterprise document stuff is very dear to the Adobe founders' hearts. It goes back to Xerox PARC and can be seen in PostScript, Acrobat, the Frame purchase, the OCR stuff, etc. Adobe's founders are brilliant strategic thinkers and I think they want to figure this one out before they retire.
To make the enterprise document strategy work, I speculate that Adobe will announce new products in the not-too-distant future. And perhaps along with the new products will be strategic partnerships with companies like Microsoft, HP, Oracle. Success is not assured, but if Adobe lays out a credible plan it will boost the stock significantly over the next couple of years. I'm not sure I believe Adobe has what it will take to win this campaign--it's very ambitious and it threatens Microsoft--but I really believe itis where Adobe is going to make a very serious push over the coming years.
Meanwhile, the current Adobe revenue stream based mainly on graphics applications will continue to grow at anywhere from 0% to 30% in any given year. Low end of the range if Apple blows out in a messy way. Top end of the range as long as Apple manages to hang in there and IF Adobe aggressively exploits all the new digital graphics opportunities in video, photography, etc. Best guess is 15% or so.
Adobe's management, cash, market leadership, and track record clearly justify a P/E of 20-25. But if/when Adobe opens the new enterprise document front in a convincing fashion, I don't see why the P/E shouldn't go to 25-30.
This analysis suggests that Adobe is pretty well protected on the downside, while still having some speculative potential upside. |
