Oracle Corporation (ORCL): Adobe Systems Incorporated (ADBE) and a Tale of Two Clouds

The Marketing Cloud

Adobe’s other cloud-based service, the Marketing Cloud, aims to provide digital marketing services to companies. It offers clients a full suite of tools to measure and manage gathered data from social sites, online purchases and page views. As the Internet evolves, these tools, which can quickly chart sitewide statistics, are invaluable in planning and streamlining e-commerce strategies. 70% of Adobe’s digital marketing revenue is generated in the United States.

On this front, Adobe Systems Incorporated (NASDAQ:ADBE) is about to run headfirst into some heavyweight competitors – Google Inc. (NASDAQ:GOOG), Oracle Corporation (NASDAQ:ORCL), and International Business Machines Corp (NYSE:IBM). That’s one David fighting three Goliaths. Google, Oracle and IBM are the largest companies respectively in digital advertising, databases and business services.

However, Adobe is confident that its Marketing Cloud is on track to generate $1 billion in annual revenue, and continue growing its revenue 20% annually, despite the looming threat of these rivals.

Dual-cloud synergies

CEO Shantanu Narayen has repeatedly emphasized the synergies between the Creative and Marketing Clouds. Narayen believes that customers from one segment will be more likely to purchase products and licenses from the other one.

For example, Adobe can use its widespread creative presence in the film and media industries to encourage those companies to purchase its digital marketing software. Large digital marketing customers could also be convinced to use Adobe’s Creative Suite software to upgrade their websites and marketing campaigns.

Combined with its Creative Cloud, online subscriptions are becoming an increasingly important part of Adobe’s revenue, accounting for 31% of total recurring revenue during the quarter, up from 26% a year earlier. Digital marketing revenue rose 25% from the previous year, while total subscription revenue climbed 53%.

Challenges and Bottom Line

Although Adobe’s long-term plans look sound, there are several factors that could derail its growth. First, the company’s comparatively modest cash reserves make its shift to cloud-based subscriptions an “all-in” bet. Second, although Adobe’s initial subscription figures are encouraging, investors will have to wait a few years to see the real churn (return) rates of current subscribers.

Third, I think Adobe Systems Incorporated (NASDAQ:ADBE) is underestimating the ability of Google, Oracle Corporation (NASDAQ:ORCL) and IBM to gum up its growth in digital marketing. Those three companies have much stronger cash positions than Adobe, and have shown in the past that they aren’t afraid to take losses to claim market share.

Source: Yahoo Finance, 3/20/2013

Google is an especially dangerous rival, not only in digital marketing, but also cloud-based creative software. The company’s cloud-based service, Google Drive, already offers a full suite of free office software – Google Docs. In the future, Google could offer cloud-based alternatives to Adobe’s Creative Suite software for free, and although those might not satisfy professional users, they may be enough for average consumers.

In closing, I sincerely admire Adobe’s efforts to brave short-term losses while focusing on long-term goals. It’s the kind of visionary effort that many large tech companies shy away from executing out of a fear of quarterly losses. I believe Adobe’s efforts will pay off, but even so, it is walking a tightrope with a small cash position and it is staring into the eyes of some very well-funded rivals. Therefore, Adobe Systems Incorporated (NASDAQ:ADBE) is an ideal stock for brave, patient investors who share the company’s long-term vision for the future.

The article Adobe and a Tale of Two Clouds originally appeared on Fool.com and is written by Leo Sun.

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