r/valueinvesting
Adobe - Unbreakable or on the Brink? A view from its customers (Part 2/2)
Analysis of Adobe's bull/bear cases shows high FCF yield, buybacks, and stickiness outweigh AI and competition risks.
- High enterprise stickiness with non-negotiable file formats and ~95% retention rate.
- Attractive valuation with 10%+ FCF yield and over 25% of shares being bought back.
- Bear cases are largely myths; even single-digit growth would yield huge investor returns.
- AI tools could develop into full-stack automation loops, threatening Adobe's core business.
- Low-end tools and competitors like Figma are taking share in specific tasks.
- Apple's potential Creator Studio launch could be a major long-term threat.
Fair to say my Adobe post is getting a lot of heat ahead of Q2 Earnings later today
**Here's** **part 2/2 of the free deep dive analysis** into the bear cases, so you can be fully prepped
!TLDR is:!<
Part 1 - bull cases
- Adobe’s stickiness in enterprises is huge — its tools have been used daily for decades, even by those that hate the brand, and their file formats (.ai and .indd) are non-negotiable
- Retention rate remains at \~95% — Creative headcounts are shrinking but it’s not weakening Adobe’s moat
- Nothing has to go right at this valuation — it just can't go hugely wrong. 10%+ FCF yield and 25%+ of shares being bought back suggests big returns
- Competition is heating up — to be expected as there’s huge margins up for grabs
Part 2 - theoretical bear cases
- Myth busting bear cases! 1. Adobe's customers are huge enterprises not beginners/freelancers ; 2. there are no signs of pricing power erosion ; 3. Adobe file formats are patented ; 4. Adobe doesn't need to get back to historical levels even single digit growth over 5 years would give huge investor returns
- What could slow growth? low-end tools make a move to compete upward (e.g. Affinity) ; competition has been successful at taking share in certain tasks (e.g. Figma) ; headcounts will shrink and eventually that could catch up to Adobe seat counts $
- The real risks to know: consumption-based model destroys the quality of the business ; AI tools develop into full-stack automation loops ; competition takes share of individual tasks until Adobe ecosystem is no longer worth it
- The Adobe Killer? The launch of Apple’s Creator Studio is probably the most worrying (if unlikely) prospect . 90% of Pro's use Mac's , apps would make switching low friction. Right now, its limited and the low-pricing targets content creators -- will it stay that way?
My take from inside the industry
- I’m willing to bet that humans will always be needed in creative work. Perhaps even more so than in a world with AI agents. Creativity is a 12x multiplier on marketing spend.
- If humans are needed - Adobe is needed! Barring HUGE changes in the competitive landscape which we should be seeing more signs of by now
- Even a reasonable bear case valuation gets you to \~$300 a share , giving you a 20% margin of safety
- I'm buying buy NOT loading up the truck . These next few earnings calls are crucial
I mean you might be right in your analysis, but I wouldn’t touch this stock with a ten foot pole. Sounds like a classical case of a value trap. And as someone who used Adobe products for 2 decades and taught many of the programs at Uni level, I absolutely hate the products and the company and their predatory business practices and I know I’m not alone. AI accelerated software development will empower competitors to make much better products. And many competitors already made better products for some use case pre-AI such as Figma and Affinity you mentioned. Their development pace should only accelerate while Adobe has nowhere to go but down. Such a shame really. They could’ve been the cool “Apple of creative software” and instead they decided to be the Microaoft run by suits who will use more time thinking of legal ways to pump more money from you when you want to cancel your subscription rather than improving products and getting new customers.
Great insight, thank you Julius!
My interviews definitely uncovered that brand hate you've touched on, which will usually come back to bite a business eventually. But the fact you've hated them for 20 years and still had to teach those programs says something too.
Adobe doesn't necessarily have nowhere to go but down, they make enough cash to lead the pack.
I would hope that an incoming CEO would agree to your point about suits and starts putting innovation first, but the $25B of buybacks on the table would suggest otherwise...
Humans will always be needed in creative work. Since 90% of their users are professionals the risk is overstated, They'll lose some at the fringes. The AI can do creatives like you want them is very hard to see happening. There are too many variables.
Couldn't agree more, the essence of creativity is living in the world and drawing unlikely parallels between the things we experience. That's not a strength of AI at all
"Humans will always be needed in creative work" does not equal "More humans are needed in creative work." Adobe gains by having MORE humans, and loses by having LESS seats to sell. It's not enough for Adobe to just be on the backfoot defending its position. That results in a commodity valuation, or 10x P/E.
Bag holder here. I’m betting on the workflow integration and ecosystem moat. For example, The AI integration it has on Premiere Pro is quite impressive. It’s seamless integration.
Haha right there with you
Earning is out today. ADBE keeps growing double digits, and stock price keeps falling lol. Cuz CFO exit?
Thanks Gordo, I agree in points here.
But the objective of my analysis was to actually stress test these bear cases that get churned out by AI etc. They've definitely stagnated to an extent but freelancers and cost sensitive users are not their target, enterprises will struggle to get out of the Adobe ecosystem
It's a long answer so check the link \^ for the full analysis!
TLDR: its about the ecosystem not just a single tool
Tbh people complaining about stocks being overdiscussed has been the most bullish indicator for me lol
I think on valuation alone they are worth around $300 today.
They are also growing 10% a year revenue and like 15-20% bottom line. so.... yeah
Not only that, new CEO + Tools with other AI's will keep their business as sticky as ever
Most definitely on a downward trend and will likely go down more after earnings. Staying cautious with this one.
It went down because of the CFO exit not cause of earnings.
I’m down so much on Adobe today and this week
I hope earnings isn’t bad too
Remember: you're not down anything until you sell
Well I will be on my calls that expire tomorrow
Haha!
Dangerous game to play
It's a long answer so check the link Gordo \^ for the full analysis!
TLDR: its about the ecosystem not just a single tool
Do we really need to talk about this stock everyday?
it provides a nice reprieve between MSFT and Meta posts
ADBE can’t find a floor. It hit a 7 year low today probably
As some point it will have to. $25B of buybacks on a $90B market cap is getting a little silly
Their buybacks ain’t stoppin this shit from falling. I’m long ADBE but frustrated with this shit. Not putting more capital into into because it’s already 3% of my portfolio. But man the day it reaches 275 again I’m moving on. My CB is 260
Try to stay patient if you believe in the business!
If you do then you should be celebrating being able to buy at prices like these
If you don't and you're anxious, then it's better to sell now than hold something you think is a poor business
I thought the same and bought Puts
Investors definitely scared (or have inside info) ahead of earnings. The news would have to be pretty bad for the valuation to fall much further from here
Did I miss anything? Other than the CFO exit, all seems like good news.
Indeed. I am clueless at this point
clueless bag holders unite! major oof but still holding
DCA-ing more.. this price makes zero sense