Please ensure Javascript is enabled for purposes of website accessibility

Hate Risk? Then You'll Love These 2 Stocks

By Tim Brugger - Oct 10, 2017 at 6:48AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Despite playing in different sandboxes, these two tech leaders have a lot in common, including minimal risk.

In addition to their stellar returns in 2017, with Adobe (ADBE 0.66%) stock up 45% and Check Point Software (CHKP 1.68%) shareholders enjoying a 35% gain year to date, the two tech mainstays also share another attribute ideal for investors that hate risk: low volatility.

If the notion of wild share price swings keeps you up at night, Adobe's and Check Point's similar business models limit the chances of a roller-coaster ride some investors are subjected to. How have they accomplished their stable, but steady performance? They had an eye toward the future and the patience necessary to make it a reality.

Picture of a bar graph with a man in a suit lifting the most recent bar up to reflect growth.

Image source: Getty Images.

Trust me on this

It's been several years since CEO Shantanu Narayen made the critical decision to no longer offer Adobe's industry-leading design software on a one-off purchase basis. Instead, Narayen "forced" Adobe customers -- thousands of whom voiced their angst bemoaning the move -- to pay around $50 a month and up, depending on which solutions were needed, on a recurring basis.

Fast forward to today, and Adobe is not only delivering both revenue and earnings-per-share growth, it's doing so by successfully implementing Narayen's vision. Last quarter's $1.84 billion in revenue was an impressive 26% jump over a year ago. Adobe CFO Mark Garrett attributed the record-breaking quarter to "revenue driven by our cloud based subscription offerings." He sure got that right.

Annual recurring revenue (ARR) climbed over $300 million last quarter to a jaw-dropping $4.87 billion. In other words, even without inking any new software subscriptions, as it stands today Adobe would still bring in nearly $5 billion in revenue over the next 12 months. It's not likely subscription sales will slow anytime soon. While total sales increased 26%, Adobe's subscription revenue climbed 34% to $1.57 billion.

Another benefit to Adobe's transition to an ARR business model is expense management. Yes, Adobe's operating expenses rose last quarter, but only by 16%, which was minimal considering its sales growth. The result was a whopping 56% increase in per-share earnings to $0.84 compared to last year's $0.54 a share. No one's complaining about Narayen's "bold" business realignment now.

Follow my lead

Like Adobe, Check Point founder and CEO Gil Shwed has also implemented a cloud-based software subscription model, for several years. Initially, impatient investors tended to focus on Check Point's peers, who were posting 50%-plus revenue gains quarter in, quarter out, while Shwed and team were reporting around 8% and 9% sales jumps. It simply takes longer to build a revenue foundation of ongoing sales than hoping for a large number of new customers.

But if imitation is the sincerest form of flattery, Shwed is probably blushing as virtually every cybersecurity competitor of Check Point's is now laser-focused on building its own base of recurring revenue. Check Point's last quarter was a good indication of why subscription sales are now the industry norm.

In the second quarter, Check Point's revenue climbed  8% to $459 million, a pleasant surprise given Wall Street's expectations. The better news was the 27% jump in recurring subscription revenue to $118 million. Toss in the $202.34 million generated from its subscription updates and maintenance unit, and $320.3 million of Check Point's total revenue, equal to 70%, is now reliable and ongoing. And the percentage of stable revenue relative to total sales is growing with each successive quarter.

As is the case with Adobe, Check Point's relatively meager increase in operating expenses to $236.9 million, up about 7%, helped boost its bottom line from last year's $0.95 per-share earnings to an impressive $1.12 per share last quarter.

Consistently growing where it counts -- specifically recurring revenue and bottom-line profitability -- on a relatively slow but steady basis is what Adobe and Check Point bring to the table.

The result of delivering on their initiatives? Two steady businesses for investors who hate risk.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Check Point Software Technologies Ltd. Stock Quote
Check Point Software Technologies Ltd.
CHKP
$123.83 (1.68%) $2.05
Adobe Inc. Stock Quote
Adobe Inc.
ADBE
$368.48 (0.66%) $2.42

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.