Good software companies don't just build programs that many people use -- they build software that people would have a hard time living without. Not all software stocks can claim that, but ones that do have far more potential to benefit investors.
Adobe (ADBE 3.79%) and Roku (ROKU 3.73%) fall into this category of software stocks that would leave a significant gap if they suddenly didn't exist. So let's take a closer look at each one and why they could be great long-term stocks to hold onto.
Adobe's AI software bet
Adobe has built a strong position in the creative software space, and its most recent quarterly results prove that there's still plenty left in the tank. The company's revenue from its two largest business segments -- Digital Media and Digital Experience -- soared higher, helping Adobe reach record third-quarter sales of $4.9 billion.
Adobe's Digital Media sales, which includes the company's Creative Cloud software, grew 11% to $3.6 billion. And the Digital Experience segment, which includes software for companies to manage customer experiences, saw a revenue increase of 10% to $1.2 billion.
Part of the company's growth in the quarter came from its recent focus on integrating artificial intelligence into its software. Adobe's generative AI image and text creator Firefly has quickly become a popular tool, and the company has already incorporated some of its features into its ubiquitous Creative Cloud apps.
And Adobe's management expects AI to continue contributing to the company's growth. Speaking about AI opportunities, Adobe's president of digital media David Wadhwani said on the recent earnings call:
"... we look at the business implications of this through those two lenses: new user adoption, first and foremost, and then sort of opportunity to continue to grow the existing book of business."
In other words, Adobe believes it can both add new customers and expand its current software offerings with AI. And there is good reason for Adobe and investors to be optimistic about AI. Fortune Business Insights estimates the generative AI market will grow from about $44 billion this year to $668 billion by 2030.
Adobe is already carving out its spot in the AI-powered software market, so investors may want to consider picking up shares of the company right now. As AI software continues to expand, more companies and individuals will likely see the benefit of using AI to assist their creativity -- and turn to Adobe's software as a result.
Roku's powerful streaming advantage
Roku got into the video streaming platform market early on, and it's paid off immensely for the company. The company holds a very impressive 43% of the U.S. TV operating system market -- more than the next three competitors combined.
Cord-cutting has continued among television viewers, and Roku has benefited from the transition. Roku's active accounts increased 16% to nearly 74 million in the most recent quarter, and the amount of hours viewed on its platform jumped 21% to 25 billion.
One reason to consider buying Roku's stock is that the transition from cable to video streaming is already underway, and it's not reversing. In the first quarter of this year, pay-TV subscribers (cable, satellite, and live TV services) fell to 58.5% of occupied U.S. households, which is its lowest point since 1992, according to SVB MoffettNathanson.
While some streaming companies are still figuring out how to make their platforms profitable, it's clear that digital media services from Netflix, Apple, Disney, Amazon, and others are here to stay. The good news for Roku is that because all streaming services run on its operating system, it benefits no matter which streaming service is popular or which company ends up on top.
Another reason to consider Roku is the company's long-term opportunity in advertising. Roku's platform revenue (which includes ad sales) rose 11% in the second quarter, and that growth came at the same time that macroeconomic pressures have slowed down ad sales across some industries.
But the long-term opportunity for ad growth is intact for Roku. According to Insider Intelligence, the digital ad market is expected to grow from $264 billion this year to $395 billion in 2027. And with Roku already a leader in the television operating system space, it has plenty of potential to see advertising sales grow again when the broader market bounces back.
Keep a long-term mindset
It's easy to get caught up in the short-term noise of the market, but it's best to look beyond what's happening now and see the long-term potential of Roku and Adobe. Both companies have carved out their spots in their respective niches, and patient investors will likely be rewarded as they continue to grow into their AI and streaming opportunities.