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Adobe Inc. (ADBE)


Conclusion

Adobe is a stellar business with robust competitive advantages to protect itself from rivals. It is a market leader and will likely remain so for the foreseeable future.


It’s applications are deeply embedded inside the creative community, making it very difficult for competitors to convince customers to switch away. The positive flywheel effect makes sure that future creative professionals remain incentivized to continue using Adobe solutions. All this allows Adobe to have pricing power and continue to increase willingness-to-pay, making it a great business to own during inflationary periods (like the one today).


Adobe is likely a beneficiary of the AI revolution, in particular incorporating LLMs into its applications. This could make their software even more appealing and easier to use, increasing switch cost.


Adobe is an asset-light business requiring little capital reinvestments, produces ample of free cash that management return to shareholders via strategic buybacks.


The downsides are that Adobe solutions are expensive, which opens the door for competition to steal customers operating on tighter budgets.


Adobe will likely continue to push for growth through bolt-on acquisitions. These acquisitions have been value-creative so far, but that is no guarantee for the future. A few large, expensive acquisitions could totally change the profile of the business, significantly bringing down returns on capital.


At the current price of $415/sh - Adobe is not a buy, but certainly on our watchlist.


For full report, see link below


Adobe Investment Memo
.pdf
Download PDF • 472KB

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