r/valueinvesting
Warning to adbe investors
ADBE's low P/E is a value trap as open-source AI threatens its moat and buybacks mask stagnant organic growth.
- AI generation becoming open-source and localized will turn Adobe's suite into a niche utility, destroying its growth engine.
- Current $25B buyback program artificially props up EPS; lack of organic top-line growth will be exposed once it ends.
- Low forward P/E is a value trap if earnings shrink, meaning it will likely underperform the S&P 500 over the next 5 years.
I've seen far too many bullish posts about adbe. A low P/E ratio doesn't equal value!
A sub 10x forward P/E looks cheap for a company with high gross margins, but it's only cheap if the E (Earnings) doesn't shrink.
In 5 years, as AI generation becomes entirely open-source, localized, and embedded into basic operating systems, Adobe's legacy creative suite risks becoming a specialized utility rather than a growth engine.
Once the current aggressive share buybacks ($25B program) run their course to artificially prop up EPS, the lack of organic top-line growth will be exposed.
To put it simply , I have very high conviction that adbe will not beat the s and p 500 over the next 5 years and thus there is no point in investing now. Please don't get blinded just because you think it's cheap. The smart money can see the risks to growth
What are you making tileable materials for?
Games and 3d viz!
I am a ADBE holder so a biased opinion
"In 5 years, as AI generation becomes entirely open-source, localized, and embedded into basic operating systems, Adobe's legacy creative suite risks becoming a specialized utility rather than a growth engine."
just put down my thoughts, apologize for the long post this was fun to think about
Currently:
A fair point and I see that starting to happen with the MSFT and NVDA event couple of weeks ago and I still feel running localized models on GPUs will be more expensive than just using adobe suite, like a 70B Llama or Qwen model running with 8 Bit quantization would still need a A100 at least to get a output throuput of 2000 and that feels sluggish for large generation tasks and that's for text, for images and video the amount of data that needs to be generated is very high so you would need at least 2 A100 per employee, and lets say a team in the same floor of a building has 50 employees then its 100 GPUs, the amount of cooling required would be very high and the power drawn would be very high, and noise would be ridiculous for employees to work, so they have a to set up a server farm, and that's just for 50 employees, lets say if the company has 200 or 2000 employees, it would be better off handing off this task to be run in cloud and handled by a company that knows what it is doing so canva/adobe etc and just buy the license which is cheap, and this is where we are right now
Five years in to the future:
Lets make the assumption you make and assume that the generative models become very cheap to the point you can generate tokens at a throughput of 10k tokens/sec without GPU (this is hard if we don't move away from transformers) and is better than the frontier model today running on a local machine (big leap!). But you are missing the point that generative models are rarely used in image and video generation as they are very costly like a 10sec 4k video would need like may be 10 million tokens, so everyone uses diffusion models. But why would OS providers or open source community spend energy on training or fine-tuning a model for needs and requirement of professional editors and marketing teams a niche. Teams still need a expert tool to handle the workload with AI features in it which handles everything like licensing etc which companies like ADBE/canva are equipped and experienced in doing. Even if the frontier teams fine-tune a model for creative professionals so the choice for the purchasing company comes down to product with better features, and ADBE can fine-tune a model as well since training/fine-tuning in this paradigm (5 years in future) should be every cheap as well, so the fight comes down to which company provides better features which Adobe is fighting and doing well.
For sure Adobe's future is very uncertain, but in you assumption of all the models are so cheap to run that it can be run on a laptop easily then the risk is bigger for many companies that are flying right now like NVDA, GE, energy providers etc thereby SP500. I feel Adobe has institutional knowledge that they can use to build AI with features customers want at a cheap price with all of the legal issues handled better than the labs whose focus is spread generally. Adobe has a execution risk of properly implementing AI functionality into products, so I feel a proper choice of CEO could reduce this a bit, so I added to my portfolio at 240 taking into account AI and execution risk.
Bagholder for now with Avg price of 240, lets see how it plays out.
AdobeX
That’s a good one 😂
AI is great but isn't gonna replace what they think it will.
Will AI wipe your ass when your in a care home or even make you a cup or tea or resurface the roads or strip a wire or install a light bulb.
Warning ? they are profitable and trading at cheaper valuation, now compare this to Tesla or spacex or PLTR
Who’s to say that Adbe isn’t going to be a player in the AI game?
Organic, Sustainable, and Gluten Free.
Guys, earnings don’t matter. Just vibes. AI will replace all workers. All they need is a billion more GPUs and eventually it will stop making images with misspelled words.
I didn't know so many investors are vegan pursuing "organic" LMAO
So buy!? Got it!!
but isn’t MSFT deep in AI?
I got Adobe at $201 and then more at $193 on Friday. Now it's at $204. Seems like a great deal to me for a company that has consistently strong earnings, growth and plenty of cash. They can always make plays in AI or just buyback shares.
No. The purpose of a PROPERLY executed stock buy back is to return capital to shareholders in a tax efficient manner…but only AFTER management has determined that they have no way to make that money turn a profit for the shareholders.
Management is support to be stewards of company assets for the benefit of shareholders.
Every single company goes through this question when determine how to allocate capital from their free cash flow:.
- Reinvest in the business
- Acquire other businesses
- Pay down debt
- Pay a dividend
- Buy back shares.
You can quibble about what order the last 2 should be in. That’s fine. But when a company initiates a buyback they are SUPPOSED to be saying: “we are already reinvesting in our business sufficiently for our strategy, we see no possibility for accretive acquisitions in the market, and we are satisfied with our balance sheet. So let’s return capital to our shareholders and let them decide what to do with it.”
Now…a BYPRODUCT of share buybacks is that it increases EPS, all things being equal.
But when a company buys back shares BECAUSE they need to increase EPS because they aren’t executing very well and don’t know how to invest the money to organically grow EPS….thats a problem.
So when a company
ARR was flat, even WITH the addition to Semrush’s \~$480 million base.
That means Adobe ORGANIC ARR actually DROPPED by basically $500 Million.
12% revenue growth that converts to only 8% EPS growth, and a shrinking ARR?
Everyone bullish keeps calling out one data point at a time, one after another…but refuse to look at the whole picture.
Seems very sentiment driven at the moment. The reason why it is down so much already is because people believe that AI will replace it. So the idea that there are "too many bullsh articles" contradicts what the market is literally showing you, since it hasn't gained in like 3-4 years already. And despite this, ADBE has 18 consecutive beats, just set record revenue, and raised guidance. It feels like people are wish-casting this company to die so they can say "I told you so." ADBE is making so much money they could just go buy a small modular reactor and pivot the entire business strategy. If you believe then you accumulate. But it's been obvious that people don't believe, I'm confused about the "too much bullish" going on.
This is gobbledygook. You’re speaking total nonsense.
If you posted this thesis when $ADBE was above $500, I’d agree with you. But at $205, I’d rather be long the company with no debt, strong balance sheet, 50% margin of safety.
I do not think Adobe is great but graphic software is 'just' around 50% of income...
I swear some people come in here with minimal direct knowledge of a business or broader industry and regurgitate whatever finance jargon they got from their AI chatbot of choice. I'm struggling to even make sense of what OP is saying. What does growth being "organic" have to do with EPS trends, especially in the context of share buybacks?
I suppose it makes sense that people who rely so heavily on AI for critical thinking would also assume it's going to disrupt every industry, including software. There's certainly going to be some disruption ahead, but anyone who works in the industry can tell you that ADBE has a strong enterprise moat.
At worst, it'll be a long, slow decline in earnings as each of their products become obsolete. At best, they'll ride the boom with their own AI offerings and keep growing.
Looking at a blank page and thinking about how to get started 🙈
The problem with your argument is that proprietary software and file formats are embedded all through the creative sector, but also the corporate world. There is no software that can do what adobe does because they own the file formats as well. AI is not even close to being able to compete with Adobes suite of tools, which also has AI generators into layers. AI is making adobe products more attractive and efficient if anything.
To be fair, the ethical side is another debate, and I’m on the anti-AI league. However, there’s nothing I can do when the whole industry is pushing this thing into everyone’s face. I think from a business perspective it’s just “getting the job done faster”at this point.
But yeah I know exactly what you mean, I’m a music producer and I do not like this trend. This non-business side of view is also why I don’t think the pro workflows will be replaced by AI. “One prompt and you get a movie”, that’s just bullshit.
It’s crazy how much of a house hold name some of their products are.
People have even jacked the “pdf file” terminology to censor the word “pedofile”.
"In 5 years, as AI generation becomes entirely open-source, localized, and embedded into basic operating systems, Adobe's legacy creative suite risks becoming a specialized utility rather than a growth engine."
Why do you think anyone is going to bother localising something that requires a colossal amount of data and training that needs to be constantly updated rather than hosting it? Do you have a localised copy of Wikipedia? WHy not? Why is Wikipedia not installed in your PC?
What do you know about AI generation? Or even about software management?
Nothing. You know nothing. You've read some articles by the sort of amateur clowns looking for space to fill, and you're regurgitating them.
Or if you want to argue you have experience, explain that 5 year timeline. Explain the economics of the decisions you are talking about.
Everything is hype right now. The current owners of Anthropic and OpenAI are doing everything in their power to make you think that these are wizard level technology. Because at some point this year, they want to dump them and walk away with a boatload of cash. Why are all these OpenAI staff cashing in? And 5 seconds after floatation, you won't hear them talking about it. Because what will they care then?
People are not liking googles ai right now. incorrect answers, getting answer from reddit...... websites seeing Google as they are loosing traffic
Duckduckgo/firefox getting more users
\>Search had a strong quarter with AI experiences driving usage, queries at an all time high, and 19% revenue growth.
Sure, who is using Google when you can ask AI, revenue is down negative 19% lol
Most people saying these things are either flogging AI companies, or writing for garbage publications.
The latter ones don't realise how much OpenAI and Anthropic are doing things just to generate press releases which \sound\ amazing but are actually not that big a deal.
My one mistake with the SaaS companies was buying too early. I should have waited for Anthropic and OpenAI IPOs.
I think there's a gigantic echo chamber on "SaaS is dead" but because that echo chamber is so big, the sentiment is at the rock bottom and a lot of analysts can't go against that echo chamber becuase the \career risk\ is a real thing when you decide to become a contrarian. The same group might have claimed that "Google is dead because ChatGPT is amazing!" or "AMD is dead because NVDA is so gooood", the price action drives narratives.
The way I see AI going forward is that it will be adopted into workflows / pipelines that are in the traditional SaaS softwares and those will be enhanced greatly. The seat model might change to usage based model when it comes to the AI features, this part might cause some uncertainty in the near-term revenue / margin. And it will get the short-term multiples compressed, which is understandable but when it's done too extremely it becomes a head scratcher.
For Adobe, I keep hearing people talking about Canva and I honestly don't think they are anywhere close to the Adobe enterprise ecosystem moat, they are far from achieving feature parity. In fact my friend's company has licenses for both Adobe and Canva (who would have thought!). I think the disruption risk is real but it's definitely not catastrophic yet the market is pricing in catastrophic ending.
Personally, when I am making a bet I am just betting on a high / positive expected value in return and an asymmetrical risk / reward, it doesn't mean I will win but when I win, the payout is good and if I lose, the loss is not that painful. If there are real signs that FCF is getting murdered on paper I will fold and cut the loss. I remember buying AMD at $90 and saw all the posts about how that's a stupid decision. People are waiting for certainty, but usually when the certainty shows up, the price already recovers so there's that lol.