r/valueinvesting
Adobe 's business - view from customers
ADBE is a value pick with ~9% FCF yield, high retention (94-96%), and deep workflow entrenchment despite AI headcount cuts.
- Attractive valuation with forward operating earnings yield near 9%, offering significant margin of safety.
- High switching costs and ecosystem lock-in (.ai/.indd formats) ensure 94-96% enterprise retention despite AI disruption.
- Exceptional pricing power and gross margins approaching 90% demonstrate resilient business fundamentals.
First time poster, long time reader!
Adobe looks like a great value pick right now, so I'm starting there.
I've just published my first post on SS, analysing the business from the views of those in the industry. It's been insightful & given me conviction. I'd love to get feedback from disciplined investors?
Here's the TLDR:
- $ADBE at a forward O/E Yield of nearly 9% at the time of writing, the Digital Media business just needs to survive at these levels to give investors a real chance of outperforming
- I’ve worked with users closely and found Adobe's Suite entirely embedded in workflows. Unless marketing goes extinct, Adobe licenses are mostly non-optional.
- The brand has HUGE salience & stickiness but not always love... just check out the subreddit r/FuckAdobe
- Ad agencies (IPA survey) say timelines have dropped (70%) due to AI, but asset requirements have multiplied 5x. Headcounts have already fallen (-14.3% YoY: IPA)
- Yet: Adobe’s ETLA retention remains at 94%-96% and revenue growth continues
- A Midweight designer told me: “You won’t find enterprises using only non-Adobe tools, they can’t deal with .ai & .indd formats… way too risky”
- Agency Pro: 'clients are integrated into the Adobe ecosystem, so switching isn't worth it… it just creates a time bomb before a client send you something incompatible.'
- Management might cut creative headcount to juice margins, but are unlikely to risk operational supply-chain failure to save an $80/m software subscription.
- “The single most important decision in evaluating a business is pricing power”( Buffett) Gross margins are still exceptional and growing – approaching 90%
- It means competitors are heavily incentivised to try to take share from Adobe’s highly profitable products though, but have an uphill battle to do so.
I'd appreciate feedback from investors, especially those who disagree with the thesis. Part 2 will focus on the bear case and key risks.
The long term issue is they are losing the beginner/amateur market to other software and prompt tools. Newer generations aren't investing hundreds of hours learning their tools but prefer faster results and simplicity which other software like Capcut now offer. Industry standards can change a lot in 10 years, buying ADBE is essentially betting on it to stay the same.
Really thoughtful criticism, thank you.
This could be a long term risk but as I say in the piece - those Adobe users have never been their target market, highly complex enterprises are where 70% of their £ is made. Every educational facility in the world is still teaching Adobe and every enterprise still using it.
I've touched on the capcut type of competition in the piece too - enterprises still have to be embedded in the ecosystem. if they prefer one specific tool from elsewhere they can't drop Adobe, they have to buy both
adobe is not software that sells primarily to amateurs... capcut is taking share from windows movie maker and that kind of thing.
Yes enterprise software is a different class all together.
You can't vibe code it. Take any serious software - it'll take years to reproduce it.
There are so many workflows and features baked in to softwares interface, capabilities.
Network effect is also a big one.
At the same time, Adobe or others not going to stay static for others to eat market share. They will also adopt increasing its gap to new players.
Yes take a look through the link, I deepdive into a lot of those bits.
Definitely loads of strength there but we'd be misleading ourselves if we don't admit there's still real risks
Honestly looks good, i think AI tools replacing ADBE/FIG is unlikely. The main question is how seamlessly AI can be integrated within these workflows, and how quickly can ADBE/FIG monetize agentic tool use.
Like what you mentioned, AI is a force multiplier on creative assets. But it is a limited tool for collaboration and not every workflow can integrate seamlessly with AI.
I think if ADBE can correctly monetize agentic tool use, they will break ATHs, if they fail to do so then damn.
Imo a potential risk is an INTEGRATED product from GOOG/Anthropic/GPT, where enterprise licenses comes bundled e.g., LLM api usage + ADBE-like suite + one-click migration / file compatibility.
Newbies never paid for PS or the creative suite anyway. As long as I remember, everyone who started creative work as a hobby had a pirated version. Vibe-designing gets you nowhere from a professional standpoint. You just have to learn working with Adobe. It’s the absolute industry standard. At least when it comes to graphic design. If you want to build a career in the creative/design industry, you start to work in an agency that provides you with the software. If you freelance, you can of course decide for yourself but you have to exchange open files at some point whether it’s with the advertising-, packaging- or brand-design agency. As soon as these files won’t work properly for the other end because someone send an Affinity Design draft or something, this probably has been the last time working with that person. Do I have problems with Adobe software from time to time? Absolutely. Do I have the time to change to another software and convince everyone to do so? Surely not.
I partly agree, although I don’t think office software and creative software are directly comparable.
I see Adobe’s moat primarily in workflow lock-in. Branding and packaging projects are often produced at massive scale and involve multiple companies working together. Mistakes are extremely costly, so people tend to rely on tools that have proven themselves over time. Whether we like it or not, those tools are currently Adobe products.
It’s not just about file formats. You also have to ensure that brand systems, format adaptations, plugins, templates, company servers, asset libraries, and print production requirements all work seamlessly together. On top of that, for most organizations, an “everything in one place” solution is simply the easiest option.
A new software platform that can do everything Adobe does — or even do it better — would first have to earn the industry’s trust before being fully adopted. It would need to convince design schools, universities, agencies, and institutions to move away from long-established Adobe partnerships and start teaching a new industry standard. Being a cheaper alternative alone is not enough.
I’m not saying it’s impossible. Figma, for example, managed to do it in web design. But web design was never really Adobe’s core business to begin with. And I still remember the discussions from our management about why we suddenly needed a separate Figma subscription when we already had Adobe XD and were paying for the entire Creative Cloud suite.
Maybe I lack imagination, but I struggle to see all of this happening within the next five years.
Workflows are, in my opinion, the only logical argument for an Adobe moat. The real question is…at least in my opinion…does the increased competition erode margins in the medium term, and customer retention in the long term.
Flabbergasted by the level of ignorance. Current negative sentiment stems from absolute ignorance of what Adobe is and who uses it.
People seem to think this is AI vs. Photoshop…
Ex: Has anyone considered the 750bn worlwide publishing (print /digital) industry that heavily relies on 100+ distinct job titles utilizing standards like Adobe Indesign, Indesign Servers, FrameMaker, Bridge, Incopy?
That is just one example. Their ecosystem is the universal connective tissue of an unbroken, interoperable, and interdependent creative pipeline…from pre-production to marketing.
Adobe isn’t going anywhere.
- I put very, VERY little stock in relying on file formats to sure up the moat. I can easily create a PDF from a word document. Don’t need Adobe.
- No one is really saying Adobe is dead. No one who is legit. The argument is that their (more or less) monopoly (and therefore pricing power) is over. Canva, figma, and even google (maybe more??) are encroaching on their territory.
That means the battle for new / smaller accounts will heat up, dragging prices down.
That will need to be made up with pricing in the mid tier and higher clients.
At least SOME of those customers will churn every year.
And at least SOME of those customers, before they are acquired by Adobe, will be acquired by the competitors.
So:
- Higher competition in the amateur / hobbyist / small customers
- Reduced pricing power at the margins of the mid and top tier customers.
- Higher customer acquisition costs at those higher tiers.
Not to mention ruin they have yet to prove they can successfully transition their customers to a usage pricing model instead of a seat model without significant churn.
Still too risky. Management has to prove themselves first.
Now I am just a beginner and more of a speculative trader than a value investor. I read news, not financial reports, so take my conclusions with a grain of salt.
However, the CEO selling 75K shares at $243 is one of the most bearish signals here. People will say "oh it's just retirement diversification" but bro built this company from the ground up. If he genuinely thought ADBE was about to pop off and the stock was dirt cheap, he wouldn't be dumping on the way out. Or at minimum he would have sold less. He's worth hundreds of millions, he doesn't need the liquidity that badly.
The valuation looks insane on paper but when the guy who knows the business better than any analyst just sold 20% of his position near multi-year lows… that's him telling you something without saying it. Perhaps he saw the next upcoming CEO doesnt have good vision. Or perhaps he saw no hope for the decreasing ARR or stalled guidance. Either way, it is just a huge red flag to me. But I am a beginner so this might be super common and the stock will just pump in the coming months.
"there are many reasons to sell, but only one reason to buy"
Adobe is a strong company for sure, but the market is largely sentimental and fickle. People who have been holding this stock for 8 years are pretty much at zero profit, despite having double-digit revenue growth every single year since 2015. I'm currently holding ADBE, so I do hope I'm wrong, but I just see the market continuing to punish ADBE unless something really amazing happens to shift market sentiment.
Thanks for this detailed reply!