Here's Why Adobe Systems Incorporated Stock Will Continue To Soar

If anyone deserved a promotion, it's Adobe (NASDAQ: ADBE) CEO and president Shantanu Narayen. Coming off another stellar quarter and fiscal year, Narayen has Adobe soaring, and he's earned his recently announced position of board chairman to go alongside his roles as CEO and president. One of the reasons Narayen warrants his chairman role is Adobe's constant pushing of the innovation envelope.

Adobe has long held the distinction in the design community of being a leading packaged-software provider. But thanks to a few targeted acquisitions and internal development efforts, Adobe is now a cloud leader as well. A recent concept video speaks directly to Adobe's willingness to explore new opportunities, despite what some pundits think.

Adobe Cloud. Image source: Adobe.

Reading between the lines

Shortly after Adobe shared a voice-editing feature it's exploring, it released a "concept video" demonstrating a similar functionality for images. The demo of a voice-activated digital assistant shows a user changing the size, framing, and saving of an image. The demo finishes with a voice command that instantly loads the edited pic onto the user's social-media page.

A number of industry pundits chimed in with their disappointment in the feature, complaining about how "simplistic" it is. They missed the point entirely. There's a reason Adobe called it a concept video: The technology hasn't even progressed to the beta-testing stage. The demo was simply a way to introduce another of the innovations Adobe is undertaking to stay ahead of the curve.

Some creative types also bemoaned the notion of having to learn another method -- in this case a voice-activated personal assistant -- for editing their projects. But there's a reason some of the biggest players in the tech industry, including Adobe strategic partner Microsoft (NASDAQ: MSFT), are testing voice-activated assistants incorporating artificial intelligence, like the Windows king's Cortana.

According to one estimate, the use of virtual assistants will grow by nearly 35% annually over the next seven years, becoming a more than $11 billion market. As voice-activated tools like Adobe's early-phase editing tool expand their capabilities, just as with Cortana, using the technology will become second nature.

The bigger picture

Setting the criticisms aside, Adobe's editing demo speaks directly to its commitment to innovation. In addition to working together on incorporating virtual reality (VR) and augmented reality (AR) into Adobe's design solutions -- a natural fit for creative folks -- the two companies recently partnered in the cloud, using Microsoft's Azure platform to incorporate artificial intelligence (AI) and advanced analytics into Adobe's Marketing Cloud solutions.

Just as with its editing-assistant demo, the strategic alignment with Microsoft is an indication that Adobe has no intention of resting on its laurels, which should be music to the ears of investors -- particularly those concerned with Adobe's incredible performance of late.

Coming off a quarter and fiscal year in which Adobe reported record revenue of $1.61 billion and $5.85 billion respectively, its shareholders have enjoyed a 44% jump in stock price the past 12 months. Some may question Adobe's relative value, given its trading at a whopping 49 times earnings. Don't.

Due in part to continuously exploring cutting-edge new features and technologies, Adobe stock is trading at a mere 24 times forward earnings, less than half its current valuation. Another feather in Adobe's cap is that its transition to an annual recurring revenue (ARR) model is hitting on all cylinders. Adobe exited last quarter with trailing ARR of $4.01 billion.

In addition to building a strong, relatively stable revenue foundation, ARR also gives Adobe the flexibility to focus its spending on developing new advanced functionalities. Much of the 12.7% increase in operating expenses last year, which was more than offset by Adobe's 22% increase in revenue, was spent on research and development.

Adobe's decision to act, rather than react, to the ever-changing possibilities offered by new technologies is a big reason it will continue to outperform its peers...despite what near-sighted pundits may think.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's Board of Directors. LinkedIn is owned by Microsoft. Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.