“America’s $2.89 Trillion Super Weapon Revealed!”

Motley Fool's special report stock revealed: "The Rise of the Creative Class: 1 Jackpot! Stock Using the 'Microsoft Model' to Make You Rich."

By Travis Johnson, Stock Gumshoe, October 2, 2013

Irregulars Quick Take Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)

“It’s not some new type of nuclear bomb… It’s not a secret stealth drone army… (We’ve already seen plenty of those lately)… And it’s definitely not some crazy Area 51 mad-scientist experiment.

“To tell you the truth, it’s the furthest thing from a killing machine that you could possibly imagine. But its 41 million moving pieces are making top Chinese officials nervous.

“And this is your ONE SHOT to cash in…

“Before the fat cats on Wall Street beat you to the life-changing profits.”

That’s the lead-in to the latest teaser pitch from the Motley Fool, for their flagship Stock Advisor newsletter, and it’s teasing what they call the latest “jackpot” stock pick from Fool co-founder David Gardner.

Gardner has certainly had some hits over the years, including some incredible long-term winners that required abundant patience but generated 1,000%+ returns, stocks that you’ll always hear the Fool ads tout like Priceline.com, Amazon.com, America Online, Marvel, and a few other shining examples … but that’s not to say he hasn’t picked his share of stinkers as well.

So what is the growth stock that he’s picking this time for Stock Advisor?

Well, as the Fool has been doing lately they’re having a different employee carry the water for the Gardners in the promotional hype-filled ads — this time around it’s Frank Stewart, who is a graphic designer at the Motley Fool … and the letter that’s running over his signature is all about how America’s $2.89 trillion super weapon is … the “Creative Class.”

The argument (short version) is that the creativity of the American worker, particularly the “creative class” folks like Frank Stewart who come up with new ideas, new visions, and new inventions will continue to give us a leg-up on global competitors whose societies don’t yet nurture those “creative juices.”

And, more importantly for our immediate consideration, he says there’s riches to be made on the rising importance of this “class” of folks:

“I’ve had a little help from one of the most famous investors in the world. Don’t worry; you’ll meet him in a bit. He was able to pinpoint one shocking company that stands to profit from this surging $2.89 trillion American super weapon.

“For now, this company is lying in wait. But make no bones about it. They’re merely biding their time. Waiting for the opportune moment to step out of the shadows.

“And when they do, they’ll be poised to reap unheard-of profits …

“And you’ll be right there with them. Ready to vacuum up what can only be described as a Microsoft-like 46,211.70% return in the stock market, if they follow the path I’m convinced they’re on.”

The ad also goes through a pretty standard Fool littany of long-term optimism, which which I have some sympathy — it’s true that there are lots of reasons for concern, but there have almost always been abundant reasons for concern and the global economy has always grown over the long term and rewarded the strongest companies, including recoveries from wars and depression and everything else.

It might well be that current financial crises or debt problems are worse than past ones, but we all have a tendency to believe that our current crisis is the worst possible one … and that feeds the fearmongers. Past performance is no perfect indicator of future returns, and I certainly hope to prepare myself for any future crashes and to remain diversified and focused on the long term … but I’m more comfortable relying on 75-year trends than on the worrisome present.

But that might just be my personality — I’m an optimist by nature, so I get turned off by doomsayers and cheered up by those who look at positive potential for the future, you certainly might feel differently.

Back to the teaser pitch — what’s the secret pick that they hint at as “the remarkable opportunity…[that could]… ultimately go down as David’s biggest Jackpot! Stock yet…?”

Well, it’s a play on the “Creative Class” that Frank Stewart belongs to, and I suppose I do as well — he cites author Richard Florida in talking about this, and this quote from an article last year sums up the idea of this economic force pretty well:

“I define the Creative Class to include people in science and engineering, architecture and design, education, arts, music and entertainment whose economic function is to create new ideas, new technology, and new creative content.”

Now, I won’t go off on my soapbox too much and say that the current us educational system is moving too much away from creative thinking and toward “teach to the test” rote learning that characterizes education in many other countries, including China and Japan where test obsession is said, by this ad at least, to help “stifle creativity.” I’m sure you all have your own thoughts on that matter.

No, we’re going to look at the company that the Fool is touting as a way to invest in the creative class … here’s more from the ad:

“Unfortunately, you can’t exactly invest in the Creative Class itself. But luckily for us, there IS an alternative.

“Now, I’m going to have to ask you to strap yourself in for this part…

“In fact, this will be the single most important sentence of my entire conversation with you today…

“You CAN invest in a company that DRIVES the Creative Class.”

OK, so what’s the company? We’re told that it’s …

“Like buying Microsoft in 1986.

“Right before it became the most powerful company on earth….”

OK, now you’ve got me interested. Here’s more to whet your appetite …

“But how did Microsoft make dreams like these come true? Easy. They found a fast-moving trend that was undeniably revolutionizing the American economy. A trend they knew would last for decades. Then they created a product nearly every one of those computers would need in order to function.

“Starting to sound familiar? It should. Because David Gardner’s next Jackpot! Stock is doing exactly the same thing. Microsoft had their personal computer revolution. And David’s next big winner has the rise of the Creative Class…”

“… this company’s trajectory is so similar to Microsoft’s that The New York Times ran a rumor a few years back saying Microsoft was considering buying them out.”

That’s all well and good, and saying that we’ve got the software locked up that will drive the creative class probably has many of you making guesses (probably even correct ones), but we don’t want to just guess… we get enough clues that we can be certain of a match, like these tidbits:

“… this company lets the Creative Class do their work as quickly and easily as possible.

“Think of the company as the paintbrush that the artist holds while he paints his masterpiece….

“I promise this isn’t some teenybopper social media fad. In fact, Amazon uses their software daily. So does Google. Same with IBM and GE. And Wells Fargo and Wal-Mart.

“Almost every established company needs this company’s software. Truth be told, I’m using it as we speak! In fact, there’s no possible way I could do my job without it.”

And then some specifics:

“Much like Windows, David’s next Jackpot! Stock has no real competitors in their business space. That gives them a dominant position in the market for the 41-million-person Creative Class. And obviously allows them to dictate pricing power and increase revenue margins.

“It’s no wonder they brought in $832.78 million in cold, hard profit during 2012 alone. That’s more than Facebook, LinkedIn, and Netflix combined. By a lot.
Heck, take a look at Amazon. They’re one of the most popular companies on the planet, and they lost $39 million in 2012….

“David’s next Jackpot! Stock has already climbed an impressive 81.26% in the past couple of years alone….”

So now you’re probably close to guessing who this is too, right? OK, fine, we’ll let the Thinkolator spit out it’s 100% certain answer now: This is Adobe Systems (ADBE), which does indeed sell the software platforms that power much of the work of many segments of the “creative class” … and which did indeed book profits of $832.78 million in 2012 (though recent quarters have been worse, and 2012 was a flat profit year over 2011).

ADBE is a very large company, with a market cap of about $26 billion, and I don’t think that this ad came over the transom before a couple days ago but it was likely written close to a month ago (or they at least wanted you to think that) because it teases that you must get in on the shares before the next earnings call on … September 17. Two weeks ago.

ADBE did release earnings on September 17, and they actually missed the average earnings estimate by a wee bit … but they said enough optimistic things about the future and about the adoption of their subscription pricing model that the stock bumped up close to 10% anyway.

Adobe has a lock on much of the market for their creative tools in web publishing and creative design, including such ubiquitous tools as PhotoShop, and their huge and complex programs with steep learning curves have created a network effect — not just because their tools are the best or only in their class, but because the switching costs in terms of new software licenses or training needs are very high. Some competitors, including Microsoft, have effectively bowed out of the core design space because they couldn’t compete with Adobe’s products, so in that way they’re a little bit like the Microsoft Office of the design and creativity world, and we all know that some of their products, like the .pdf file, are completely ubiquitous in every phase of modern technological life. Probably their product that faces the strongest competition is Flash, which powers web animation and more complex web experiences, since folks for years have been expecting HTML5 to take a bigger chunk of that marketplace, but it’s still used by millions.

So what’s going on? Well, Adobe has had some problems with (or at least some user griping about) keeping up to date and being nimble in updating programs, and their software often has high up-front costs that have turned off many — one of their responses has been to move, just like Microsoft is trying to do with Office, to a cloud platform that is paid for on a subscription basis, updated more frequently, and creates what is expected to be a more consistent and predictable revenue stream for Adobe. It’s not entirely clear how this will go with large customers over time, just as it’s not clear with the Microsoft Office transition, but apparently the initial signs are positive. They reiterated that last quarter, and the CEO went into more detail here in an interview back in June. It’s still early days on that front.

Adobe is expensive looking, as almost all David Gardner picks are — the forward PE is a hefty 33 or so, and analysts are only expecting growth of 15% or so in earnings. And the generally more cautious folks at Morningstar put a fair value of just $38 and think it’s at a “consider selling” level here at around $51. So this is not unlike many other Gardner picks in the past, he’s likely predicting a huge surge of increasingly predictable revenue and earnings increases over the coming years that will make the current worrying about whether it’s overvalued seem silly. And if the cloud software offering really takes off for them, it might bring in a lot of new customers who can’t afford the traditional software suite (the “Creative Cloud” bundled offering for “everything you need” is $49 a month, their last full suite of traditional software is more like $2,500).

It’s certainly an interesting and maybe risky proposition — I haven’t looked at this in much detail before reading the ad this morning, but my initial wonder is whether we’re going to see revenue shortfalls in this “Creative Cloud” transition as we get less of a lumpy revenue picture from new software releases. If we’re not seeing a big wave of $2,000 software purchases with the new software, maybe we’ll see a disappointing quarter or two even if it means we’ve actually got a much more appealing recurring revenue business from the Creative Cloud. If the company gets a dip because of something like that, it might be more appealing (and indeed, such a dip in revenues may be what’s happening already, I’m not sure about that).

Is Gardner right that this will be like buying Microsoft in 1986? Well, that I can’t tell you. It’s a company you’ve likely heard of, it’s big and established and has a huge “moat” in its core software products that many in the “creative class” can’t do their job without … but whether or not it’s a good buy here for your money, only you can make that conclusion. If you feel like sharing your conclusion with us, feel free to shout it out with a comment below.


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32 Comments on "“America’s $2.89 Trillion Super Weapon Revealed!”"

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Wilfred Taylor
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Wilfred Taylor
October 2, 2013 4:14 pm

FYI. Pat Cox has joined John Mauldin in a new venture. John is taken to Cox and thinks he will be great in a service to promote new biotech.

Wilfred

Linda
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0
Linda
October 3, 2013 11:37 am

I actually thought this one was juniper Networks.

Gary W
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0
Gary W
October 2, 2013 4:28 pm

Right off the bat, this cannot be like Microsoft in 1986. That’s just silly. Microsoft benefited from IBM’s legitimization of the entire PC proposition, and their monopolistic mindset carved out a huge part of a brand new space. Not to mention stealing Windows and getting away with it. Adobe is not the only or dominant player in a NEW worldwide wave. It has a great model for repeat business, but the cloud pricing is risky. I would wait for earnings to tumble and buy after a couple of bad quarters.

advantedges
Member
56
advantedges
October 2, 2013 4:44 pm

Stock is Basing, going sideways. It could break either way. Travis, did you consider that ADBE could be taken over? IF it Is becoming a really a strong player in the Cloud, then perhaps CSCO or a MSFT or (Less Likely) CRM, EMC or YHOO might consider buying ADBE?

advantedges
Member
56
advantedges
October 2, 2013 4:47 pm

FYI TRAVIS Here is the IBD comp’s on ADBE…..Not very Highly rated, several major competitors in the space. SmartSelect Ratings
Rating Checklist
Composite Rating 53 Fail
EPS Rating 23 Fail
RS Rating 81 Pass
Group RS Rating C Neutral
SMR Rating B Pass
Acc/Dis Rating B+ Pass
Group Leaders
Top 5 companies in the group above $10 – sorted by best composite rating

TYPE
MONOTYPE IMAGING HLDGS

MSFT
MICROSOFT CORP

SOFO
SONIC FOUNDRY INC

ADBE
ADOBE SYSTEMS INC

RHT
RED HAT INC

pjakobs
Member
0
pjakobs
October 2, 2013 4:49 pm

I’m a creative cloud user and have been an adobe customer for years (I’m a web developer). It’s a great company and I like what they’re doing with creative cloud… but the main difference between adobe now and Microsoft in 1986 is that Microsoft’s potential customer base was pretty much everyone, whereas Adobe’s is just people who work in the creative fields. That is a large group, but not as nowhere as large as “everyone”.

advantedges
Member
56
advantedges
October 2, 2013 4:49 pm
FYI TRAVIS Here is the IBD comp’s on ADBE…..Not very Highly rated, several major competitors in the space. ADBE Composite Rating 53 Fail EPS Rating 23 Fail RS Rating 81 Pass Group RS Rating C Neutral SMR Rating B Pass Acc/Dis Rating B+ Pass Group Leaders Top 5 companies in the group above $10 – sorted by best composite rating TYPE MONOTYPE IMAGING HLDGS MSFT MICROSOFT CORP SOFO SONIC FOUNDRY INC ADBE ADOBE SYSTEMS INC RHT RED HAT INC
advantedges
Member
56
advantedges
October 2, 2013 4:52 pm

OOOOPS…. Sorry, Duplicate!

anonymole
Member
0
anonymole
October 2, 2013 5:13 pm
So, how accurate has The Mottled Fools been in the past – per the charts, pretty accurate. How often has Gardner blustered with such outlandish hyperbole? Anyone? If such Foolish pontifications are rare… then either ADBE has something we don’t know about, or maybe it’s not ADBE? Or if Gardner puffs up all his suggestions with such pomp then maybe ADBE has some life left, but not anything stellar (like the new MSFT). How long do Motley recommendations take to flourish and produce, on average? Should we wait for a month while the market corrects during the debt ceiling and… Read more »
tanglewood
Irregular
170
October 4, 2013 8:45 pm

Let’s not forget Linkedin (LNKD) that has had a spectacular rise from about $115 in mid-january 2013 to $245 today.
http://stockgumshoe.com/reviews/motley-fool-rule-breakers/i-bet-you-117238-20-that-this-stock-explodes-in-2013-motley-fools-get-rich-on-wednesday-pick/

bluesky85541
Member
1
bluesky85541
October 2, 2013 5:13 pm

I’d say we’re about 2 decades past considering this the same as Microsoft in the mid-80’s. MS-DOS 1 came out in the early ’80’s and did away with the old “mini” or “department” computers running CPM/DOS. Adobe got the “PDF” acronym to itself in the mid-90’s – and took off. Mid-90’s was when to buy ADBE and hang in for the run.

timmyg
Member
0
timmyg
October 2, 2013 5:17 pm

I’m a professional photographer that has used every adobe product for years and can tell you that their approach to the cloud has not been received very favorably in the photography community. Hence they dropped their subscription price already. Big mistake on their part. My guess is they’ve run out of ideas to improve photoshop and are trying to secure a consistent cash flow based on yearly subscription rates instead of upgrades.

Charles
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Charles
October 2, 2013 5:24 pm

Do you think this (ADBE) is a good buy?

henrytd
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0
henrytd
October 2, 2013 5:29 pm
As a user of Adobe products for photography, they are great tools, but the Creative Cloud pricing method (as opposed to buying the software, and then upgrading every several years) is not popular with many photographers, even with the current lower price to get people to try the switch. My information comes from various forums where photographers are grumbling about this move. Of course it’s possible that a large proportion of the buyers (about to be renters) of Adobe software (which of course covers a great deal more than just photography) are institutions which may find that the advantages of… Read more »
rosalindr
Irregular
24
October 2, 2013 5:44 pm
Almost all of Adobe’s “creative class” products were originated by Macromedia in the ’90’s. If Macromedia had been better run back then it could have been the Microsoft of the Creative Class. A couple of years ago I purchased Adobe’s e-Learning Suite, which contains Captivate (CBT software), Flash (animation), Dreamweaver (website development), Photoshop (photo manipulation), Acrobat Pro (PDF creator), Presenter (slide shows), Audition (haven’t used this so I don’t know what it does yet). The box says it “Integrates with Adobe CS Live online services with an asterisk to “additional fees may apply.” These products are used by graphic artists,… Read more »
prime
Member
0
prime
October 2, 2013 7:41 pm
Indeed. I’m watching Autodesk keenly and am waiting for them to produce a “junior” 3D modeling/sculpting program, much like Pixologic did with Sculptris (a sort of intro version of their ZBrush program). If a third party produces it (as some sort of plugin) Autodesk may just acquire the company. I’m a little suspect as to the timing of this pitch. There is significant backlash by Adobe customers about not being able to access their files if they cancel their subscriptions. This would seem like a good time to check out their competition as rival companies may present a better growth… Read more »
Cabaokeguy
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0
Cabaokeguy
October 2, 2013 5:54 pm
It is difficult for me to articulate myself well in this format (you on the other hand seem quite good) but there is some changes happening due to an inability to agree on formats for distribution to multiple different pieces of hardware. ie; standard computers, laptops and the myriad different mobile devices. Flash is out. Hotmail5 is on the way out and there is a disruptive technology on the horizon that enables any computer to play video or audio directly through the browser instantly, doesn’t require trans coding and reduces band width by as much as 95%. Do yourselves a… Read more »
John M. Chenosky, PE
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John M. Chenosky, PE
October 2, 2013 6:44 pm

The real revolution will occur when the process of pattern making or prototyping is properly identified, there is no printing involved.
Archway Systems’ 3D RHINO and Bentley Systems Micro Systems are front runners. My engineering firm was a beta test site for Archway’s Versacad 2D in 1982 and a user ever since. Don’t count these California companies out
The real advance will come when the prototype materials become more varied and versatile.

anonymole
Member
0
anonymole
October 2, 2013 8:21 pm

Question to the group: are all stocks identified through Travis’ scrutinization generally accepted to be suspect in quality? Or is it ever the publishers that are judged? I mean, Agora gets way more wrong in their picks than right. But the Motley Bros. get most of theirs right? But does it matter?

Srepetti
Guest
0
Srepetti
October 3, 2013 12:19 am

If it’s Dassault Systems you’d like to get, you can buy DASTY on the OTC pink sheets. We build plating line equipment at work, and the 3D software SolidWorks by them has helped us a ton. Cheers, Steve.

philippe
Guest
0
philippe
October 3, 2013 1:32 am

Travis, Its a pleasure reading your pieces. I appreciate that you also dont force yourself to have an opinion when you dont have one. A 42 billion market cap has more of a chance of becoming a 60 billion market cap. However, when the entire company’s future revenues are being based upon a new business model (the cloud) then its a bit dicey. The real question is, without major multiple expansion can you see a 5x growth in their business which would justify a microsoft marketcap…with shrinking margins, and less sticky customers, this isnt an easy buy.

Richard
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0
Richard
October 3, 2013 4:22 am

There are a number of competing programmes out now which should be causing Adobe a few worries. They should learn from Micro$ofts expensive lesson(s).
1) Any number of pdf print drivers that can just turn any text doc into a pdf, albeit not as fancy.
2) Nuance, which can do a fair bit more
3) Corel, various programmes, inc Draw and Paintshop Pro
4) Xara Designer Pro for all manner of vector drawing, DTP and websites.

The start up costs are much lower, the learning curve flatter and after all, these programmes are not being used to generate the next Mona Lisa for Pete’s sake!

Jon
Guest
0
October 3, 2013 6:51 am
I have been paying the Adobe subscription for their e-learning suite for over a year now. There are three reasons why I would not trust this stock to be a high performer at Gardner’s predicted level, or anything close. It may be a reasonable long-term stable earner. 1) This is hardly a ground-floor opportunity 2) Adobe have just about the worst customer support management of any company of size that I have dealt with in recent years and I am about to terminate my subscription because of that. I would rather use a portfolio of Serif and NCH products. Granter… Read more »
Slick Rick
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0
Slick Rick
October 3, 2013 10:06 am

ADBE is not a bad stock, but owning ADBE is like drinking Tension Tamer tea. Why not grab a “Red Bull” type of stock and really put some firepower into your portfoilo? Loonk Here http://finance.yahoo.com/echarts?s=ADBE+Interactive#symbol=adbe;range=2y;compare=himx;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

hgpark888
Irregular
1
October 3, 2013 1:36 pm

Like other fellow stockgumshoe users said, I don’t think ADBE will be a high performer.
Their recent subscription model caused many loyal users upset and I myself decided to stay with their older version.
Their subscription model may create constant cash flow for the company but if users decide to find alternatives, ADBE may be out of luck.
Also, their stock is already became quite expensive.

Naveen
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0
Naveen
October 5, 2013 9:17 pm

What do think of adobe as short at these prices

David
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0
David
October 6, 2013 11:55 am

Terrible pitch to anyone following tech stocks over the last few years. Adobe will still be needed for the photographers, publishers etc. Overall, the paid software industry is in decline and Adobe will suffer the same fate everyone else from Open Source software. HTML5 and Gimp are already nipping at Adobe’s heels.

Phil
Guest
0
Phil
March 23, 2014 8:55 pm
Let’s not forget Apple’s own growing portfolio of indigenous or acquired or appropriated or passenger software. Some of it has improved capabilities that have made Photoshop and Acrobat Professional subscriptions unnecessary expenses for some in our company. At home, I use these or other open source tools. Certainly not as good as Adobe’s (or Macromedia’s past offerings) but they fit my needs. I like the concept Gardner is selling, and I may be too code to the trees to see the forest (it’s happened before), but in this space I see the less-expensive competition eating away from the margins, and… Read more »
OhDannyBoyO
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0
OhDannyBoyO
October 7, 2013 12:49 am

I think it is the 3D Printer market… we are only now just scratching the surface… it could bring manufacturing to its knees… (like those in China)

frankal101
Member
0
frankal101
October 8, 2013 4:30 pm
Creative solutions is 70% of ADBE revenue and decreasing. They seem to be focused on digital marketing (ad design and tracking etc) and have made a number of acquisitions in that space – big revenue growth in that part of the company. The big thing about conversion to cloud model is lifetime customer value – the recurring revenue model increases the profit per customer by a factor of 1.5x or more (dont hold me to these numbers – check out their investor meeting for the info). Also elimination of piracy is a big deal for revenues in creative division. If… Read more »
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