This Major Brand Is a Cash Flow Machine for Investors

As a dominant player in a niche business, Adobe (ADBE 0.87%) sits in a powerful position. In this Motley Fool Live segment from "The Rank," recorded on March 14, Fool.com contributors Jason Hall, Travis Hoium, and Danny Vena evaluate Adobe's stock and its growth potential going forward. 

Jason Hall: There is a good chance that somebody has emailed you a file in the past, ever, it was a PDF and Adobe created that format. We're all familiar with the Adobe PDF. Of course, part of Adobe's business that has become growing is the signature capability of PDFs. Editing ability and the ability to make them legal documents. That's been going on for years and years, and of course, just like we've seen with DocuSign, it's become far more compelling and interesting since the pandemic. When we needed these tools to have remote signing of documents and then to be legally enforceable. That's a really interesting part of its business.

But I think the part of its business that sometimes investors have just forgotten about is the one that's been the keystone of its business forever, and that's Photoshop and Indesign. It's creative suite of products that designers use, and creatives use every day. It is incredibly powerful, it's very profitable, and just like Autodesk with AutoCAD, it is a decades-long industry standard. It is the thing that they use in the schools from your first time all the way through your professional career. It is just such a valuable, embedded, entrenched business. I think just like with Autodesk, actually we could use Autodesk instead of Adobe Systems, we'll have to talk to Bill Mann about that, is that you have this shift in the way that products are being built, and also the types of products that are being built that consumers are going to use with augmented reality, virtual reality that Adobe is a leader in. They are absolutely already there and those products are already getting traction. I think that's something we really should stress. Travis, look like you wanted to add something here.

Travis Hoium: No. I was just thinking it would be a good idea to put together a list of companies that would be things you would find on a resume. Like, I know the Adobe suite, I am proficient in Excel. When you become something that is on a resume, you have a really powerful position in the market. The other thing I think is really nice about Adobe's business is, it's kind of niche. Microsoft, you're not going to see it as a bit bigger.

Jason Hall: But it's a really big niche.

Travis Hoium: It's a really big niche, but it's not something that you're going to see Apple or Microsoft go, you know what? We're going to kill Adobe because we're going to come and make a better Photoshop. It's just not something they're going to do.

Jason Hall: Exactly.

Travis Hoium: It's a really powerful position for them to be.

Jason Hall: Yeah, that's a really good point. I'm glad you brought that up. The other thing too, I want to stress, is that this is a business that has already made that transition very successfully to subscription-based software, for a very long time it was sell the boxes. This honestly, in a lot of ways, this was one of the harder industries to get the marginal customers shift away from the old products and buy the new products. Because if you're just doing a certain thing, you could use Indesign or Photoshop for 10 years.

Adobe got that revenue when you bought it 10 years ago, and that's it, they don't get another penny. They've almost completely shifted, I think more than 90 percent of their revenues now come from subscription services, and that is a really powerful, strong business. It gets it out of the economic consumer cycles and the buying cycles, because its customers want the latest, they get the latest, and they have it as soon as they hit the update button on their screen and they don't have to pay another penny. Danny? You rated this one lowest, this was your number 8.

Danny Vena: It was, but again, we're talking about world-class companies and I don't think we're going to see a huge amount of revenue growth from Adobe. But on the plus side, if you look at what Adobe does, if you are a digital artist at all, you probably use something in Adobe's suite of products. If you work in the background on movie production, and you're creating special effects, there is a lot of Adobe that's used for so many different things that we don't even think about. I think that's probably one of the reasons that I rated it as low as I did because, yeah, I think this is a cash flow machine. They made that decision a decade ago to switch to a subscription model and fundamentally changed the company's future. I think Adobe is a must-have for any portfolio. But I also don't think you're going to see growth like we have seen with so many of these high-growth software-as-a-service type stocks. I think this is going to be on the lower end of growth in that spectrum.

Jason Hall: Yeah, this is high floor stalwarts business to own right here.