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Tickers in this Article: ADBE, MSFT, ORCL, AAPL, CSCO, GOOG, IBM
There are at least two different ways to assess Adobe's (Nasdaq:ADBE) performance over the past 16 years. In terms of execution of its business plan, Adobe has been a breakaway success - products like Photoshop and Acrobat dominate their niches to the point were "Photoshopping" and "PDFing" are verbs that almost everyone recognizes.

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On the other hand, Adobe has not been such a runaway success as a stock. True, the stock is up about 400% over the past 16 years, but that is not all that impressive relative to Oracle (Nasdaq:ORCL) or Intuit (Nasdaq:INTU) and basically matches Microsoft's (Nasdaq:MSFT) performance - even though Adobe should have the advantage of being a more nimble company with more opportunities for growth.

The question for investors, then, is perhaps not so much whether Adobe can maintain its dominance and expand into new territories like smartphones and tablets, but whether investors will reward that growth.

An Iffy Second Quarter
Adobe's second quarter was a "yeah, but" performance that looked good in some respects, but had a few spots on it. Revenue climbed over 8% from last year and beat the consensus, but virtually all of that beat seems to have stemmed from less disruption in Japanese sales (due to the natural disasters) than originally forecast. While sales of Creative Suite were solid, enterprise sales were relatively weak and performance in Europe was especially problematic.

Below the revenue line performance looked fairly solid. Gross margin improved from the year-ago level and stands at an eye-popping 89%. Operating income grew 22% and operating margin expanded almost three full points from the year-ago level.

Competition Not Letting Up
While antitrust concerns may put some limits on Microsoft's ability to compete, Microsoft is nevertheless a formidable competitor to Adobe in many of its product categories. Likewise, while companies like Corel and a host of smaller companies with free offerings may not be a direct threat in Adobe's core customer base, it does chip at the edges of the company's moat. (For more, see What is an economic moat?)

At the same time, Adobe's efforts to grow in web conferencing and analytics is constrained to some extent by rivals like Cisco (Nasdaq:CSCO), IBM (NYSE:IBM) and Google (Nasdaq:GOOG). Everybody seems to see these as growth markets and it looks as though fierce competition is whittling away the economic benefits to be had.

Is There an App For Growth?
Adobe seems to putting a great deal of emphasis on positioning itself as the go-to provider for app development software. While Adobe has had its issues with Apple (Nasdaq:AAPL) (Apple does not want Flash on its phones or tablets), as well as some performance issues with Research In Motion (Nasdaq:RIMM) and Motorola Mobility (NYSE:MMI) products, this is nevertheless a market where Adobe pretty much has to succeed to stay relevant.

The trouble, though, is whether there is enough revenue to be had in web development, analytics, and app development tools to deliver meaningful growth. Along the same lines, investors seem to be nervous that Adobe will throw money at acquisitions in a bid to boost growth and penetrate attractive niche markets.

The Bottom Line
The law of large numbers basically dictates that growth will get increasingly difficult for Adobe. That is problematic because growth is so key to the valuation and popularity of tech stocks. While there are solid intellectual arguments that patient discounted cash flow investing should work in technology as well as anywhere else, it is more challenging in the real world. Accordingly, Adobe looks too cheap by the fundamentals, but investors considering this as a bargain tech play should realize that the concerns about growth could stretch out the timeline on seeing that value to an unacceptable degree. (For more, see Autodesk Still At the Drawing Board.)

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