00:00 Adobe has been one of the markets best stocks since its IPO back in 1986. Right now the company
00:06 has a market cap of $195 billion, with $5.7 billion of cash and investments and $3.6 billion
00:14 of long term debt, the enterprise value is $193 billion. Revenue over the last 12 months is $18
00:20 billion, net income is $4.7 billion and free cash flow is $7.3 billion. So the company is valued at
00:28 11 times revenue, 41 times earnings and 26 times free cash flow. This is an expensive valuation
00:35 and that's because Adobe is a consistent performer. The company has grown revenues every year since
00:41 2012 and it operates with incredible gross margins of 88%. Part of Adobe's success has been a seamless
00:48 transition to subscription products which now make up 93% of total revenues. Adobe's long list
00:55 of products including Photoshop, Illustrator, Fresco, Premiere Pro, Acrobat and more are all
01:01 tied to the booming creator economy and these products are perfectly suited to the subscription
01:06 model. However, Adobe came under pressure last year following its planned acquisition of Figma
01:12 for $20 billion. Investors felt the price paid for Figma was way too high. Others said that it
01:18 showed how much competition Adobe is facing. Upstarts like Figma and Canva and AI tools like ML
01:25 Runway and Mid Journey can do the same things as many Adobe products and in some cases do them
01:30 better. However, since that collapse the stock has rebounded and Adobe has announced its own
01:36 contribution to the AI race. In a company presentation last week, Adobe unveiled generative
01:42 tools for Photoshop that wowed users with the ability to quickly enhance and expand images
01:48 through AI. This has caused a real buzz and no doubt more AI tools are on the way for all of
01:53 Adobe's other products. A major question for investors is whether users are going to stay
01:58 with existing leaders like Adobe or whether they will gradually migrate to alternatives over time.
02:04 While Adobe faces the problem of competition, smaller upstarts must deal with Adobe's scale.
02:10 There's no doubt Adobe is a quality company with first rate operating margins and strong
02:15 management. Even if AI based competitors cannot destroy Adobe completely, they could surely put
02:21 some pressure on Adobe's pricing. At the current $200 billion valuation which is 11 times revenue,
02:29 the stock is expensive. But because of Adobe's position in the creator economy and its long
02:34 history of outperformance, I'm going to give the stock a cautious bullish rating. But these are my
02:40 personal opinions not financial advice and I've got no position in Adobe's stock.
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