Adobe

Cheap for a Reason?

This is going to be a particularly brief and shallow post. Adobe’s cash cow is their photo and video editing software. While subscription revenue and net income have both roughly doubled in the past five years (see model here), the future of this business is particularly uncertain.

This is because Meta and Google are both improving their advertising stack such that eventually brands will be able to come to their platforms, provide some very basic photos and information on the products, and Meta and Google will handle the rest using AI to maximize return on ad spend in a way that humans just can’t compete. This would theoretically mean the number of people using Adobe’s products to create online ads shrinks. The challenge as an investor is that Adobe doesn’t spell out how much of their revenue comes from this type of user. This makes it very hard to handicap the future trajectory of this business, and it is therefore in the ‘too hard’ pile for me.

If you’re optimistic about the future of Adobe’s creative cloud and you think the business will continue to grow revenue at 8-10%, you could easily double your money in the next five years assuming the multiple stays where it is today at 20x net income and they continue to return free cash flow to shareholders via buybacks.

Management is trying to paint AI as an opportunity for Adobe, but it’s hard to get behind this story knowing what Meta and Google are doing with their ad tech. There are also the obvious competitors to Adobe in Figma and Canva, the latter of which has added $3B in revenue in the last five years. Future growth in this space will be hard fought.

I have a very small position here just to see how things unfold over the next few years.