Has anyone else been adding Adobe to their portfolio? AI fear has gripped the stock and FCF yield is hovering around 7%. Strong track record and I personally see this as blatantly undervalued.
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Yes, I agree with you – the expected return is computationally attractive. However, considering the development of AI and intensifying competition, the risks have increased. Therefore, a moderate allocation to the stock seems like a wise solution. Investors buying Adobe are taking the view that Adobe will succeed in maintaining its market leadership position and that AI will not be able to completely displace the company’s products.
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Completely agree. I myself don’t believe AI will replace Adobe’s market-leading position, but rather possibly make it better if they manage to integrate AI into their own programs.
Still, AI is for me (and should be for others too) a relative grey swan, therefore I’m not taking any 30% position. But the position will grow as long as results improve and the price drops 
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An interesting situation at Adobe. Either the sentiment is wrong or the numbers will weaken in the future. Current situation:
- Numbers improve quarter by quarter
- Stock price is falling
- Sentiment: AI will kill Adobe
- Sentiment: Figma and other new competitors will kill Adobe
A good example of how sentiment, not fundamentals, drives a company. Google had a similar situation some time ago, “AI will kill Google’s search business” was the sentiment, and at the same time, the numbers showed that search revenue was growing quarter by quarter. Gemini was, of course, complete garbage a while ago, which also lowered the stock price. Google was still an easier purchase for me because they have Waymo, TPUs, and an AI corporate culture (they invented the transformer, AlphaZero, etc.). I understand less about Adobe’s product, market, and company. Someone could tell me more. Please?
The stock has been in a 2-year bear market, and since lower lows are occurring, it cannot be bought yet according to TA. An upward RSI divergence and large volume would be a buy signal. My tracking position is 15% in the red.
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Adobe has a couple of known issues.
It is hated by users due to its pricing model and continuous product modification. Alternatives are actively being sought, and creative professionals constantly complain when Adobe “improves” its software, breaking familiar workflows in the process.
Adobe operates in a market where people might soon be laid off as AI generates content instead of “meat sacks,” which means fewer licenses generating money in the future. Adobe is also heavily adding AI features, but it’s an open question how this would compensate for declining user numbers.
So, it’s hard to see how Adobe can squeeze more money out of its customers. Already, the company is losing customers to competing products due to pricing, and if there’s a significant exodus of the customer base to unemployment or McDonald’s cash registers, it’s hard to be bullish about the future.
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This is the narrative now. However, large companies and organizations bring in the majority of the revenue. They are unlikely to hastily switch to “meme generators.” The entire publishing and design process, with hundreds of users, is integrated into Adobe. Copyrights and details are handled meticulously, etc.
Adobe says it serves a large number of big enterprises (including 87% of Fortune 100)
Adobe reports that among its top enterprise-clients, many large firms adopt its AI-enhanced tools: for example, they recently said that nearly 90% of their 50 biggest enterprise accounts have implemented one or more Adobe “AI-first” solutions.
Even for Excel, there are 10 better competitors, and AI also calculates the numbers. Companies still pay MS, and with co-pilot, even more than before.
It could also be the same trend as 3 years ago - ‘nobody uses Facebook’ was read here and on Twitter when the stock was $90. In the summer, it was a ‘fact’ that nobody would use Google in the future when the stock was $130. News follows the price.
I guess I’ll counter the market again when a big tech company is dying because of AI.
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I know the situation firsthand from one big company where IT is constantly hunting high and low for Adobe licenses that can be terminated because they are so expensive. I.e., every single Adobe license user in the company constantly has to confirm that yes, it’s still in active use.
So even if the nice statistics say that 87% of Fortune 100 companies use Adobe, this doesn’t necessarily tell the whole story if in a company of 10,000 people there are 50 licenses circulating among the few individuals who (still) need it for work, and even this number is constantly being reduced…
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It certainly looks like a buying opportunity with a remarkably cheap valuation. Or a turnaround company in a negative sense?
It would be interesting to know what Adobe’s foothold looks like from the perspective of people in creative fields. For AI competition, Adobe also has Firefly, which at least based on marketing, looks good. On the other hand, the prices are high, so I wonder when the camel’s back will break. For example, Canva-owned Affinity recently made its Photoshop/Illustrator competitor free (AI features are paid) and both still in one program.
Illustrator’s .ai file format seems to be the standard in the graphic design industry, but if an alternative is much cheaper and almost as good, then perhaps that could change too?
Profitability would likely be under pressure in the long run.
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Thanks @Jarnis, you just articulated the narrative I meant. Just like Google recently had “AI kills search”, “DOJ breaks up the company”. The problem is that even for Adobe, there is no data for this narrative yet, and perhaps there never will be. And if that happens, an easy 100% rise is on the cards.
There was a contradiction in your messages, @Jarnis: the first one said users hate Adobe, and the next one said how users have to fight tooth and nail for licenses when IT administration tries to claw them back. Those two are rarely true at the same time. But let’s not dwell on that any further.
Instead, if anyone has data showing Adobe’s demise, I am very interested. Official data looks excellent
EPS $ per share
Revenue billions
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A slightly different matter - some people are forced to use Adobe software for certain tasks, but IT constantly wants to minimize the licenses they pay for. And when users perhaps switch to other software or no longer use Adobe software for other reasons, IT wants to cut off billing as quickly as possible. Employees usually don’t remember to report if some software goes out of use. The only reason to contact IT is always if something isn’t working. Some might hoard that license “just in case” they need it someday, even if they no longer actually use the software. The point was that IT aggressively looks for these because these licenses are so expensive that it’s worth spending work hours minimizing the amount paid for them.
Adobe has been making good money so far, but this trick has been done by raising prices and changing terms (which are also effectively price increases). I argue that the number of licenses in use is decreasing, but so far, price increases have kept the money piles growing. In my opinion, this is not a sustainable way to operate.
Example of recent tricks:
The timing has been hilarious, discussed in our team about the new free Affinity offering yesterday, and woke up this morning to an email saying Adobe is increasing the price of the creative cloud Pro by an extra $27 monthly, from $87 to $114 in our local currency.
Oh but wait, you can ‘downgrade’ to the standard plan that has less AI features (will be doing). But for those who don’t catch the email, you’ll get locked into a year of that absurd increase.
My favourite part? The opening of the email “our mission is to empower creators.” No your mission is to squeeze every last little drop of money from people you can before the competition actually starts to heat up.
So the latest trick is to raise prices because of new AI features, and if you don’t notice the announcement of the subscription price increase and switch to a cheaper option, you’ll pay the higher price for a year because that’s the length of the billing period.
The right way to make such a change would be to try to sell the new fancy AI features and offer a more expensive option that includes them, and if you’re not interested, the subscription continues as before at the old price without new features. But no, Adobe doesn’t do that.
Before this, Adobe has, to my understanding, already raised prices twice this year.
And yes, it is precisely because of moves like these that IT departments hunt for savings by trying to get rid of existing licenses as quickly as possible.
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I referred to the sentiments of Inderes’ design team members in this video a moment ago. There is no substitute for Adobe products (yet) for real professional work where the quality must be top-notch. They do actively use Adobe’s etc. AI features which facilitate some things.
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Adobe has been the industry standard, but as the industry changes radically, one could imagine Adobe wanting to increasingly profile itself as a professional tool. If what a communications professional used to do is now done by a 7-year-old in a park with a phone, why would Adobe want to try to be the choice of that 7-year-old? Similarly, those large entities hoarding unused licenses are a hindrance to price increases if the product’s function holds. For the sake of monetization, one could sometimes spin off something light under the same brand, like in clothing, real tools, or cars.
The challenge, of course, is to still be the functional tool for the visual industry, but the industry’s shift towards generic automation makes the competitive landscape less attractive and more difficult. Time will tell if it’s a collapsing floor or a moat.
It is certainly true that Adobe’s time as a general visual tool, which eager users learned as teenagers by pirating, is over. But so is the meaningfulness of striving for it.
Adobe raised prices with AI features, but Adobe is also among those who could charge for AI without making graphics cards. It could retrospectively be a foolish expulsion of casual customers, or it could be bubble resilience. If Adobe is disrupted and becomes obsolete, then perhaps it cannot withstand the AI revolution, or perhaps it was already a tech company with an inherently higher valuation.
However, it’s a clear choice in terms of pricing to be the target for margin squeezing when companies cut back on overpriced licenses for visualizing memes and meta-work. The biggest risk is probably that the industry standard will emerge from there, from that 7-year-old in the park. But what Adobe has built over the years probably doesn’t make sense to try to stop the potential disruption of the rest of the world alone.
If competition, on the other hand, makes perfectly controlled visual production cheap and fast, from Adobe’s perspective, the game is already over. But there’s still a long way to go.
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One investor’s view:
Adobe faces the risk that someone will overtake them in development with some super easy-to-use AI tool. Currently, the software is nicely integrated, and the workflow is quite seamless.
There has been competition for a long time, some of which has been acquired by Adobe or by those wanting to enter the market. No potential competitor has yet emerged with which one could do absolutely anything that comes to mind.
Adobe’s tools have a significant market position because, in a nutshell, they save time once you’ve learned how to use them. Then, when a need arises for something you haven’t done in a while or ever, you can find a tutorial on YouTube. Additionally, there are separate workflow automations for which ready-made custom components are available.
In practice, Adobe offers a very wide range of tools for workflows, whether it’s creating vector graphics, stylizing and producing imagery, editing and creating video, modifying or creating PDFs, or making brochures. These are the tools I use. They also save other employees’ time and make the organization more flexible when one person knows how and has the tools to do virtually anything related to the subject area.
There will be price increases, and they will come in different forms in the future. Will a pain threshold be reached at some point? Certainly. Can, for example, AI tool tokens be directly passed into prices as users become more efficient? No, because token prices decrease as models develop, and there must be other benefits to that ecosystem from the user’s perspective.
The need for digital marketing will grow and change its form significantly. If Adobe starts imitating and integrating features that simplify, for example, Canva’s workflow in the future, which would be relatively easy to implement, the situation, in my view, would then become a rather clear win for Adobe.
As risks in the short term (0-5 years), I see that the American consumer is under pressure, which means a decrease in the number of seats as B2C companies scale down marketing according to the cycle. This, in turn, would add fuel to the AI narrative. Secondly, competitors start creating more comprehensive software with which they will compete with Adobe application by application - with slightly better implementation and lower prices. For some software, so-called permanent customer losses could occur, meaning Adobe would lose customers. Thirdly, prices are raised too quickly, and pricing does not remain value-based in the users’ opinion. Fourthly, AI might someday in the future enable such high-quality output that, for example, marketing videos and other materials for Coca-Cola and Trivago campaigns would be automatically generated without any stylization, appearing more impactful than what a creative team of humans could produce. This is still a rather distant vision, but development has been rapid so far.
Adobe’s moats, in my opinion, currently bolded: Brand power, network effects, scale economies, switching costs, cost advantages, and regulatory protection.
Here is my train of thought on the company in question, structured in a few minutes. The AI narrative is strong, and it hasn’t directly impacted the numbers; the future looks hazy, but with a few thought experiments, familiarization, and examination of the numbers, one can get some idea of what the company’s future might look like.
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For example, I know two examples of situations where Adobe has been abandoned:
In one municipality, there is no longer an Adobe license. Small event advertisements can be made with Canva. If something bigger is needed, it’s outsourced.
I do journalism myself, and I’ve noticed that in the layout of local newspapers, and even larger ones, there’s been a shift towards layout centers or one newspaper’s editorial office laying out several newspapers. =fewer licenses needed
“Currently, the software is nicely integrated with each other” at the same time, Canva/Affinity offers image editing, vector graphics, and layout all in the same program. DaVinci Resolve, on the other hand, handles video, effects, and audio all in one. Of course, these competitors also have their own shortcomings in features. (=Resolve’s Fusion side struggles to compete with After Effects’ motion graphics, and would that Canva/Affinity combo still need some kind of Lightroom, i.e., the ability to manage a collection of images with archives and apply the same edits to multiple images. And what devices will these tasks be done on in the future. Both of these competitors have been enthusiastic about developing their programs for the iPad as well.
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I believe that Adobe’s future market and competitive advantage lies in organizations that need these integrated software solutions and more licenses. I don’t have figures on how big a part of Adobe’s revenue currently consists of these.
Fewer larger organizations want to juggle Canva/Affinity, DaVinci Resolve, and a Lightroom equivalent when talking about hundreds or thousands of licenses.
I don’t believe that Municipality X, which produces some Canva ads (larger ads bought externally are still made with Adobe), will be among Adobe’s core clientele in the future.
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Implemented brazenly, but let’s consider this price together now. A ‘meat sack’ (person) who uses the product earns 4000 per month. Then we allocate to this ‘meat sack’ rents, other IT equipment, and ancillary labor costs. We’re soon at 6000 per month. From that, 114 money is 1.9%, which is exactly 3 hours of monthly working hours (158h).
Is it worth chasing a 3-hour saving per month with a very big gun? In my opinion, no. In fact, if the product is good, the price could perhaps be increased by 50%.
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Of course, there are many users for whom Adobe’s pricing, even after these price increases, makes no difference, but there are also many users who feel they are getting poor value for their money. For a while, one can milk [customers] by relying on the software being a “de-facto standard,” but I believe there’s a significant risk that this is not sustainable. Competitors have already emerged, and their features are rapidly improving. Treating the paying customer base poorly with the attitude of “pay, or cry and pay, we don’t care” usually leads to problems at some point.
And yes, Microsoft has recently made very similar decisions regarding the pricing of the Office 365 / Microsoft 365 mess. It is, however, such a standard in the business world that I don’t see a problem there regarding corporate sales, but on the home user side, the situation is different. Well, this is going off-topic, but Adobe is not the only one that has recently pressed the price increase button without remorse.
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Municipalities are not currently, by default, Adobe’s target audience. Caricaturing it, one could say that organizations whose most important metric is marketing effectiveness in relation to currency. For them, marketing costs are structured differently than for municipalities. For municipalities, employee salaries and tools are often a large expense, whereas for these companies, channels like Google, Meta, etc., consume a large part of the marketing budget. Canva creates the opportunity to do good-looking marketing for small sums, precisely for the example you mentioned above.
The newspaper business is evolving, and I agree with your observation. Similarly, social media, for example, is also evolving. Quite a few successful YouTubers or other social media stars have other teams behind them who professionally handle editing. Many can start with tools like Canva, for example. For some, at some point, there will be a need to outsource that work, at which point Adobe’s tools will be used.
Adobe has faced competition for a long time. Affinity and Resolve have been on the market for some time. They are good tools, with competitive prices and pricing. Those shortcomings are often precisely why users switch to another tool, which is often Adobe CC.
Time will tell what happens to Adobe.
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Below is a tweet about Adobe’s share buybacks and a reply to that tweet. In the reply, the tweeter expresses that the quality of buybacks is more important than their quantity, because bad share buybacks destroy value, but at Adobe, they have increased cash flow per share. It states that management allocates capital exceptionally smartly, which is apparently a big green flag. 
https://x.com/KoyfinCharts/status/1997009602945470775
https://x.com/TheTimeInvestor/status/1997321799449608351
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