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By all financial metrics Adobe is a high quality business: they have almost 90% gross margins with operating margins of 36%, revenues have grown double digits annually for the past decade, and they have little reinvestment needs with excess cash flows being directed to buybacks, shrinking share count 17% in the last 10 years.

Today they trade at just 14x earnings or 12x free cash flows.

The stock is now down 65% from all-time highs. The key risk facing Adobe is AI and the associated business model disruption it will bring. However, there is also a risk from newer players like Canva whose freemium offering could weigh on Adobe’s new customer funnel and point solutions like Figma who have lopped off a portion of Adobe’s TAM in UI/UX. This is all the while their CEO of 18 years, Shantanu Narayen, has announced he will step down before a successor was put in place—and their ARR, while still around 10%, has decelerated every quarter since they disclosed that metric. So how much of a threat is AI to Adobe?

Now Adobe is facing…

1) A business model transition as the efficiency AI brings could reduce the number of subscriptions they sell, creating a need for them to transition the business model.

2) Competition from several players. First there is Canva whose freemium offering threatens their user acquisition funnel, and is making an attempt to move upmarket into Adobe’s prime customer base. Then there is Figma that has become so dominant in UI/UX work that Adobe employees themselves use Figma, which represents a good portion of TAM they will not recover. Plus there are still all of the legacy players from Apple’s Final Cut Pro, Diablo, and Avid Media, in addition to new lower end competitors like Bytedance’s Capicut.

3) A categorically new competitive threat from AI models. The risks this represents is multi-factorial. AI models could become so good that a lot of creative work is offloaded to an AI model that is able to produce good enough creative assets that a consumer or business don’t feel the need to employee a designer (and as that designer loses work, they will no longer need an Adobe subscription).

A lot of creative work is employed in the advertising industry and Meta and Google are incorporating the ability for users to generate ads right there in their ad tools. Ecommerce companies often hire photographers to take and edit professional photos of their product catalogues… now Amazon can do that with GenAI. Even if this doesn’t become mainstream for big brands, it could still eat into a lot of the creative work TAM.

There is also the risk that the AI models themselves, like Google’s Nano Banana, keep adding editing tools which may be good enough for basic design work. Separately, there is the fear that AI makes creating software so easy that customers themselves will be able to spin-up their own versions of photo and video editing apps, subverting the large subscription costs that Adobe charges.

Lastly, they are also facing competition with their marketing tools and there is a concern that AI agents could replace the need for a company to integrate Adobe’s creative work with the marketing apparatus.

These are just some of the key challenges facing Adobe today. However, if an investor can become comfortable with all the risks we outline in the report, then the lower valuation multiple and consistent revenue growth makes it easy to pencil out an above historic stock market return. If Adobe can navigate these risks and execute well, it is also possible the stock re-rates to a higher multiple.

We cover all of this and much more in our 99 page Adobe Research Report. You can access it here. We hope you enjoy!

Read the full report by becoming a member below! You can also just buy the Adobe report through the link below.

(Please reach out to info@speedwellresearch.com if you have any issues or need to speak to us to become an approved research vendor in order to expense the membership).

If you are a member, you can access the Adobe report here.

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The Synopsis Podcast.

We will be releasing a company episode just on Adobe in the future. Follow our Podcast below to make sure you get it when it is released!

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Adobe Table of Contents

1. Founding History
2. Business History
3. Business
4. Industry
5. Competition
   1. Digital Media
      1. Canva
      2. Figma
      3. Video Tools
      4. Other Competition
   2. Digital Experiences
      1. Salesforce
      2. Other Competitors
6. Adobe’s AI Threat
7. Adobe’s Moats and AI Strategy
8. ROIC and Capital Allocation
9. Valuation
10. Other Risks
11. Conclusion

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