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Adobe (ADBE) Stock | NASDAQ: ADBE

Covered by Stratosphere

Unlocking Creativity

Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing, and engaging with compelling content multiple operating systems, devices and media. The company operates three major segments: digital media content creation, digital experience solutions, and publishing for legacy products.

Stratosphere Score

8

Growth

8

Valuation

9

Quality

8

Margins

10

Dividend

0

Balance Sheet

7

Investment Thesis

  1. Adobe's Creative Cloud has demonstrated wildly impressive growth serving up a suite of software for Creators on a recurring revenue high margin subscription.

  2. The business is benefitting from the digital creator economy with a wide-moat and huge market share for photographers, videographers, designers and more.

  3. The Document Cloud segment is presented with a significant opportunity in document management as it already has wide distribution across most large enterprises with Adobe Acrobat.

  4. Adobe's digital services are very sticky with high switching costs for creators as the software suite can take years to master. The business will be able to capture the growth of the creator economy and digitization trends and continue to increase active users on its digital services software offerings.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Buy One, Get Creativity Free

Adobe's Creative Cloud is the frontrunner to digital art when it comes to serving creators. The wide selection of software and various applications of each software allow the platform to support any creator in any industry. Today, around 90% of all digital professionals use Adobe Photoshop in some way for their work.

With about 22 million monthly active paid subscribers, the user base continues to grow.

Adobe's success can be attributed to its unique distribution strategy - the company runs discounted subscriptions for team and education subscribers, emphasizing the idea of "learning as a team".

This has positive implications for the company over any time horizon. In the short run, it brings in more subscribers as more users are involved in using the software. In the long run, prioritizing students and helping them learn gives them the ability to familiarize themselves with the software prior to starting their professional careers.

This translates into a higher conversion rate once they decide to buy their own subscription. In a corporate or enterprise environment, purchasing Adobe subscriptions is a no-brainer as new graduates are highly likely to be trained on the Adobe platform, lowering training costs.

Adobe's initiative to focus on building a community and emphasize learning not only brings in more customers, but also keeps churn low. As users explore new applications within the Adobe ecosystem, users are more and more likely to stick given the compatibility, E2E nature, and integration of each app.

The Ecosystem Advantage

Adobe's advantage over industry specialists in digital media, document and signature services, and customer experience management lies in the breadth of its service offerings and the integration between them.

Adobe's broad focus and ecosystem-type approach to each of its growth areas have won it lots of market share and brand recognition across each category. Adobe's digital media solutions are the gold standard (who hasn't used Photoshop?), and Document Cloud and Experience Cloud provide the depth and breadth users need to get work done. Again, the E2E nature of each of the three major platforms Adobe provides is an enormous benefit to users.

The result is strong corporate relations and ease-of-use stemming from the non-siloed nature of its offerings. For example, DocuSign holds most of the document signing market share today due to first-mover advantage. However, DocuSign's only business is enabling the sending of safe and secure digital signatures. Adobe has eSignature capabilities intertwined with its Document Cloud offering - users can sign, scan, edit, and compress files all in one place.

We think Adobe's solutions will be much more attractive to enterprises due to the convenience and integration with the company's already widely used digital media and document services.

Financial Fortress

Adobe has been building a moat in documents, digital media, and customer experience management solutions while also fostering a financial fortress. The company has more cash than total financial debt and leases, and it continues to add value to users with minimal capital expenditures.

As a result, the company is a free cash flow fiend. With all the extra cash, low debt, and well-rounded balance sheet as a whole, Adobe can partake in value-creating endeavours, like share buybacks, critical acquisitions, and growth investments. Over the years, Adobe has spent several billion each year to conduct such activities.

We believe Adobe will continue and even accelerate such investments as it continues to gain share, generate tons of cash, and grow.

Opportunities Ahead

  • Adobe's digital media segment is in high demand, and that demand skyrocketed during the pandemic. The pandemic effectively accelerated digital transformation and the paper-to-digital revolution. In 2020 alone, more than 300 billion PDFs were opened, and 8 billion signatures were processed using Adobe products.

  • Adobe sees digital documents as the "future of work". To ensure the Document Cloud continues to lead this market, Adobe is integrating:

    • AI & ML-backed document intelligence;

    • expanded usage of eSignatures across all platforms and devices;

    • more efficient business workflows through APIs; and

    • partnered services to increase customer reach and overall value proposition

  • The customer experience management market is growing and rooted in the fact that each business is connected to the digital world in some way. Even some of the largest brick-and-mortar retail stores in the world have massive omni-channel presence. The key to success for Adobe's customer experience management solutions will be to host a well-integrated, versatile platform. We believe Adobe has one today. As long as Adobe continues to invest in this platform, we think it will continue to have a high value proposition to Adobe's customers.

  • Creative job openings are growing at rapid rates as the creator and digital economies expand. Other applications such as 3D and immersive content are also gaining traction. Adobe plans to be there to support these professionals in delivering superb content. The mission is similar for communicators - provide them with the tools they need to explore new use cases, make them easy to use, and empower young professionals and students to learn how to make creative assets within Adobe.

Main Risk: Your Margin is my Opportunity

Although Adobe may capture a lot of market share today, it may face stronger competition, particularly from businesses that strive to make their products and solutions simple and accessible.

Let's face it — Photoshop is not that easy to use. Many customers today would prefer simpler creativity tools depending on the type of work they are performing.

Canva and Figma offer customers with easier and more accessible tools for simple and intermediate-level creativity tasks. As a result, many users ditched Photoshop and Spark for these easier-to-use services.

If these services create a powerful ecosystem similar to Adobe's, Adobe may face serious competition that threatens its near-monopoly and high-margin business in digital media.

Canva x Spark GraphicSource: FixThePhoto

Outside of digital media, we see similar risks. DocuSign dominates the eSignature market and the digital experience market is also highly saturated with players like Google, Oracle, SAP, SAS, Shopify, and others.

Adobe is not a pure-play of any one particular segment. It is a combination of several great businesses that seem to complement each other. While its product offerings are broad and comprehensive, its competition is also broad and may be difficult to track. With that, it may be possible that Adobe invests dollars or targets markets ineffectively to keep up with all its competitors in the future.

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