Editor’s note: This is part six of a 13-part series about companies whose shares have amassed 100,000% returns for investors and the path taken to generate such impressive gains over the long term. See below for links to the other stocks in this series.
Since its initial public offering (IPO) in 1986, Adobe (ADBE) has experienced one of the most impressive growth trajectories in the tech sector, with its stock price skyrocketing by a staggering 250,000%.
This extraordinary performance can be attributed to several key strategic decisions, including its shift to a subscription-based business model, expansion of its product portfolio, and continued innovation in cloud and artificial intelligence (AI) technologies. These moves have been critical in enabling Adobe to capitalize on the growing global demand for digital content and marketing solutions.
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Among the most consequential of its strategic pivots was the 2013 transition from a traditional software licensing model to a cloud-based subscription model. The move also underscores management’s vision.
In 2013, the idea of subscriptions was largely relegated to magazines and newspapers. But why not software? A subscription model would deliver one of the features that Wall Street prizes most: recurring, predictable revenues. If Archimedes said, “Give me a lever … and I shall move the world,” Wall Street says, give me stable cash flows and I shall finance the world. Since then, everything from razor blades to pet food to financial services has had subscription models emerge.
In the case of Adobe, the shift allowed the company to stabilize its revenue, yes, but also to grow it, because on a subscription basis, the software was more affordable to a wider audience.
The impact of this change shows up in the growth in earnings before and after the implementation of the subscription model. From the period of 2004 to 2013, i.e. before subscription pricing, the average annual growth in revenues was 10.3%. From 2013 through 2023, i.e. after subscription pricing, the average annual growth in revenues was 17%, an improvement of 65%.
But there is another important aspect to the shift toward subscriptions that accounts for Adobe’s success. Over the long haul, Adobe’s gross and operating margins have remained the same, meaning its cost structure was impervious to sustained improvement. That meant the only way to materially improve profitability was to increase sales, and the subscription model delivered the increase that was needed to grow earnings per share.
In one respect, Adobe got lucky. The emergence of the cloud enabled it to deliver solutions to clients in a much more productive way and this increased overall demand. Adobe’s Creative Cloud now boasts more than 30 million subscribers.
The move to subscriptions not only broadened Adobe’s customer base but also significantly increased customer retention, driving long-term profitability.
Also in the luck department, Adobe was in the right place at the right time. As businesses across all industries accelerated their digital transformation and new companies emerged that were digital only, from promotion to product delivery, the need for sophisticated end-to-end tools to create, manage, and optimize digital media surged.
Adobe solidified its dominant position in this space by expanding its product portfolio. By acquiring companies such as Omniture, Magento, and Marketo, Adobe extended its influence into digital marketing, e-commerce, and customer experience management – and made good on its proposition of offering a one-stop shop.
The company has invested in AI with the introduction of Adobe Sensei, an AI and machine learning framework. If AI delivers on its promise to revolutionize commerce, then perhaps it will revolutionize digital marketing and management, offering another leg upward in Adobe’s trajectory.
Note: This content first appeared in Louis Navellier’s latest book, The Sacred Truths of Investing: Finding Growth Stocks that Will Make You Rich, which was published by John Wiley & Sons, Inc.
