r/valueinvesting
ADBE Risks
Analyzes ADBE risks: AI seat compression, margin erosion from Canva, and suspicious executive departures, despite attractive valuation.
- Attractive valuation provides a good entry point.
- Adobe can capture a share of AI productivity gains to mitigate seat compression.
- High profit margins invite competition and risk pricing power erosion.
- Lower-end software like Canva is breaking into the enterprise market.
- Simultaneous departure of CEO and CFO raises execution concerns.
Wanted to create a post discussing every Risk that ADBE faces right now. We all know the valuation looks good, there’s no point discussing that. The investment thesis for Adobe solely rests on how well they can mitigate the risks that they face.
- Seat compression - Ai makes design so efficient that licenses compress and Adobe loses massive revenue.
A lot of people say this is the main risk we face. I don’t see this as a huge risk because Adobe should be able to get a cut of the productivity.
- Margin risk - Adobe’s margins are so fat so it’s just screaming at competitors to come over and take a bite out of it. Like Jeff says “your margin is my opportunity “
With the availability of AI tools and design I think this is a huge risk because what if competitors arise and erode adobes pricing power? The only counter I have to this would be that Adobe subscriptions are such a small expense for enterprises that they don’t care that much. But again the margins are just so fat.
- Lower end software like Canva breaking into enterprise and professional design.
This is a huge risk in my opinion because it seems Adobe is losing on this battleground when it really should have been a layup. What if with easier access to software development, Canva creates their own enterprise suite? It is also a marketing problem. When anyone thinks of creativity ; the first thought in their head should be Adobe not Canva. That’s concerning.
- Execution risk
With the CEO and CFO leaving, is there something they aren’t telling us? Have they lost hope? I saw the retired CEO of UNH come back with a full hard on to bring the company back to life. But both CEO and CFO calling it quits ? Seems very sketch. This is also the time where leadership is crucial so their little transition is very bad timing. But if it’s actually just a necessary transition for the future of the company then it could make sense.
- Customer service
You hear so much from small time designers about how they don’t like Adobe or their pricing practices. Most of adobes business comes from large enterprises. But the lack of customer care and reputation even on the lower end really rubs me the wrong way
- Super intelligence risk
If someone creates an AI so amazing that it beats any sort of design work. Or if AI stops being a commodity and there’s a clear winner that doesn’t want to share. Adobe might be cooked here but for now this is a small risk.
Please let me know your thoughts and criticisms.
Agree with the risks, on top of this there is a Freemium model risk, their Freemium model will negatively impact the ARR and it is tricky to make a model like this work. Another reason why the leadership transition is badly times.
No one catches knives harder than value investors.
Lots of bagholders under sunk cost fallacies.
Preach. I come here to make myself feel smarter
11% forecast revenue growth this year, 9% next year. Why the obsession with this stock?
https://finance.yahoo.com/quote/ADBE/analysis/
It very obviously has a future. Growth is literally accelerating.
I always thought it was a good company, but the chart was clearly broken, and as such, it offered no real value until it had a material recovery. Well, breaking below $200 was the catalyst for me. It’s simply too cheap to ignore for what it provides anymore. People who think it’s going to recover to $400 in months are silly, but the people who think this company is headed for zero are absolute morons. This is a SaaS compound crusher, and it always has been, and the widespread, continuing pattern of AI adoption has only \helped\ the case.
It’s not worth arguing about, though, because most detractors need only point at the price, and that’s truly all that matters in a trading vacuum. But it tells none of the true story anymore. It’s literally the opposite of SpaceX or Tesla, which are detached from fundamentals in such a grotesque and unsustainable way that it screams for a massive corrective event.
you know, there are companies out there that could be affected by Ai ( companies like Now Sofi etc. this up for debate, but the risk is there) and there are companies that will definitely be affected by Ai and Adobe is one of them. You only have to play for a few minutes with the stuff that's currently on the market and you don't have to be an expert to realise Adobe is fucked. And the stock price and trend is also showing that.
Thank you for taking the time. I would say I agree with a large portion of what you said except.
- I don’t think Adobe is capturing that portion a lot more than Canva at the moment.
- If AI is commodified even if it’s really good, I think Adobe benefits. Now if you’re saying Ai becomes so good , there’s no point of using Adobe at all, I have a hard time believing that because of
1. Ai labs have said hallucinations can’t really be fixed
2. When studios release something, I think they would want some edits , can’t imagine a world where you prompt a movie and release it on first pass.
Adobe at my eyes are just like Nike, a company that was overvalued and now it's near fair value
Two extremely different stories though.
Nike's fundamentals are rapidly deteriorating and the stock is still priced at 30x trailing earnings on falling revenues (I know I know, the bull case is that margins recover to 10% and on that assumptions it's only ~15x earnings).
Adobe is still growing the top line at a healthy double digit pace, with 35% GAAP operating margins and almost zero net debt. They also make the lion's share of their profits from large enterprise whales that have built large portions of their workflows around the Adobe suite, to include marketing and analytics (not creative software).
Not comparable from a business sense, at least.
For those who understand how finance and markets works this is a no brainer.
Adbe is a healthy company with zero debt, perfect balance sheets, and consistent growth. Plus, Adobe is successfully integrating AI into its models. They generate 8 billion in FCF and at this valuation, they could buy back the entire company in 9-10 years. What are we even talking about?
biggest risk is it is obsolete
They all said the same on Reddit abt Meta when the PE was 8 in 2022 and then started whining and complaining afterwards
How do you grow a business where your core principle is to screw your customers and keep them hostage int subscription they can’t get out without penalty?
Adobe’s growth is a result of tirelessly screwing its customers. To get to that growth rate and margin today, you’ve already burned the forest and milked the well. Just look at Adobe’s homepage - it’s slow, ugly, inconsistent, and tacky, does it even look like a company that builds creative software (and please compare to Canva), what you saw is years of nobody giving a shit about customer experience in Adobe. The good news is Now customers have more options now across the board (from casual users Canva/Figma/Apple Creative Studo, to the pro Davinci/Ableton/Houdini).
But maybe the culture of Adobe can be turned quickly, but it’s a zillion lines of dead code written by smart people who have left and nobody wanted to touch to risk ruining revenue. Just take a look at Lightroom, it’s a bloated pile of shit right now with gazillion of features a small percentage of niche users use because they will turn mad if a PM shuts that feature down.
Iconic SAAS giant with 90% gross margins, 35% operating margins, growing in the low teens and a buyback program that could knock out 30% of shares, trading for 10x GAAP earnings?
Yeah no idea why a value investing sub would be interested