A growth stock with a wide moat
Adobe already dominates the creative industries – now it’s expanding into ecommerce
With interest rates and inflation rising, many growth stocks – particularly those not yet making profits – have seen their share prices sink. However, this pullback has also hit the prices of several high-growth, highly profitable software companies with wide moats that protect them against competition. This has created buying opportunities.
Adobe (Nasdaq: ADBE), a substantial company with a market cap of $234bn, is one such opportunity. Most people have used Adobe PDF files at one time or another. PDF (or portable document format) is used to present electronic documents in exactly the format that the creator wants. Almost everyone has Adobe Reader on their computer to read these files. The firm also produces Photoshop, a very popular image-editing tool that has become the industry standard for digital arts.
But these are just two of a wide range of products. Adobe dominates the creative market with products such as Illustrator (graphic design), InDesign (page layout for print), Dreamweaver (web development) and Premiere (film editing) among many others. It is now building a strong position in cloud computing, through three strands: Creative (its creative applications); Document (storing, sharing and working with PDFs); and Experience (marketing and web analytics).
Plenty of room to grow
Adobe’s Experience Cloud offers marketing and advertising solutions such as campaign management, digital marketing analytics and customer engagement. There is growing demand for an independent platform of digital marketing-related products. Adobe’s strong position among creative professionals should help it to penetrate this market further by cross-selling, while the broadening of its product offering via acquisitions should make the platform even more attractive. Henkel, the €32bn beauty care, laundry and home care and adhesives company, uses Experience Cloud for selling to both consumers and businesses. It provides, in Henkel’s own words, “a superior and personalised experience across all online and offline channels for our customers and consumers”.
Adobe estimates its total addressable market for the three clouds in 2024 to be $205bn, up 39.5% from 2023, giving the company ample scope for further growth. Of the $205bn, Creative accounts for $63bn, Document $32bn and Experience $110bn.
Adobe grows both organically through research and development (R&D), and by adding bolt-on acquisitions – more than 50 since 1990.
R&D was $2.54bn, or 16.1% of revenue, in 2021. Established products such as Photoshop are continually improved with the addition of new features and applications that can be sold to existing users. Recent big acquisitions include Magento ($1.7bn) and Marketo ($4.8bn) in 2018; Workfront ($1.5bn) in 2020; and Frame.io ($1.3bn) in 2021. The largest, Marketo, provided a business-tobusiness market engagement cloud platform to strengthen Experience. The next largest, Magento, added an ecommerce cloud to Experience.
Adobe’s moat is wide
Adobe has a wide moat protecting it against competition. The moat for its creative and document clouds is based both on switching costs and on network effects because of the sheer pervasiveness of Adobe’s products. The moat is narrower for Experience, but should widen as this arm of the business is strengthened.
Photoshop (and other Creative Cloud applications) offers a good example of high switching costs. It is not just the industry standard imageediting software, but it’s also part of the design curriculum at universities and colleges, meaning the next generation of employees have already worked with it. That’s a strong incentive for creative industry employers to standardise via Adobe’s Creative Cloud.