Microsoft And Cisco Are Playing Catch Up With Adobe

Technology giants Microsoft and Cisco Systems are playing catch up with a smaller technology company -- Adobe Systems.

On Wall Street that is.

Microsoft’s and Cisco stocks have been big winners on Wall Street. They have gained 215.40% and 84.41% respectively over the last five years.

But there have been better winners. Like Adobe Systems, which has gained 459.51% over the same period—see table 1.

Adobe’s superior performance on Wall Street may come as a surprise to some. Microsoft and Cisco Systems have been the technology powerhouses. They rank number 3 and 16 on Forbes World’s Most Valuable brands, compared to a ranking of 80 for Adobe Systems.

Table 2

Also, Adobe Systems has a “tiny” market capitalization on Wall Street, $7.3 billion, compared to $98.4B for Microsoft and $48.1B for Cisco Systems—see Table 2.

Table 2

Adobe, Cisco And Microsoft Ranking In The World’s Most Valuable Brands

How did Adobe do it? By being an early adopter of “software as a service (SaaS).”

Theirs is a business model that stores software centrally and licenses it on a subscription basis.

Adobe “wrote the book” on SaaS says Tien Tzuo, author of Subscribed. Back in 2012, the company got rid of its software disks and upgrades by moving its Creative Suite software to the cloud, and charging customers a monthly access fee.

Saas provided Adobe with a steady revenue from its software, and low sales transaction and monitoring cost. “In three years, Adobe Creative

Cloud went from almost no subscription revenue to a virtual 100 percent subscription model,” says Tzuo.

That’s how the company has beaten both Microsoft and Cisco Systems in operating margins and PEG and on Wall Street--see Table 3.

Table 3

But that has changed recently. Both Microsoft and Cisco Systems have been adopting their own Saas business model.

Microsoft’s “Commercial Cloud” business segment reached $20 billion in 2018, and its Office 365 Commercial business exceeded its traditional licensing business.

Meanwhile, Cisco has shifted to an “all-in on services.” A subscription model that is. And that has helped the technology company to manage its flat hardware business while it searches for opportunities in software and services.

“Cisco isn’t just managing a dependable if relatively flat hardware business while it hunts for growth in software and services,” says Tzuo. “It’s embracing subscriptions in a broad, systemic way in order to shift from selling boxes to selling outcomes.”

Investors have taken notice, helping Microsoft’s and Cisco’s stock narrow the gap with Adobe in the last twelve months—see Table 4.

Table 4