00:00Joining us now is Stefan Slewinski, BNP Paribas, Global Head of Software Research.
00:05He hasn't outperformed on the stock, but actually lowered his price target from $290 to $248.
00:12Let's start there, Stefan. Why maintain the call but lower the price target?
00:19Hi, Ed. Hi, Brody. Good to be with you today. So as Brody was saying, look, it was a pretty
00:24good
00:24set of results across the board. There were some nitpicks, which we can go into.
00:28But we did lower our price target a bit today. We have seen a pullback in some of the multiples
00:33in software over the last couple of days. So from a relative standpoint, we've taken the price target
00:37down. But we still see a lot of upside here. This is a company that's going to be growing earnings
00:41at 25%, 30% over the coming couple of years, trading on 20 times earnings currently. If you do give
00:48them the credit and you look out towards 2029, 2030, you're looking at about a seven times PE.
00:53So if they can keep delivering, they can keep bringing capacity online, you can keep seeing
00:57the OCI growth. And importantly, if those margins and cash flows come through, which is where the
01:02market's still questioning the strategy, then the equity should perform.
01:07Well, Stefan, let's go into those nitpicks. We're showing the trading of the day. We're now down
01:13modestly 0.4%. This is a stock that early in the session was up 8.5%. What's changed in the
01:20last
01:20two hours to the mind of investors? Yeah, I think there was, even though it was a good
01:25set of results, there was no knockout punch. I think investors maybe were hoping for a bigger
01:29bounce. The implied volatility showed a 10% move on the day of results. And when we didn't get that,
01:34you know, I think some people maybe took their chips off the table. Also, you know, we're waiting
01:40for more discussion around capital requirements. Oracle have said that they need an extra $20 billion
01:47of capital this fiscal year. We think that probably comes beginning of next calendar year.
01:52They kind of punted any discussion around that to the investor day, which will come at the end of
01:56October. That'll be key. You have a new CFO. And we think that she will give commentary around
02:02what their capital requirements will be beyond this fiscal year. That can be a real catalyst for
02:06the stock, but we didn't get that last night. I think we should talk about leverage. I was talking
02:11about it with our guys at Bloomberg Intelligence this morning. You know, they have $120 billion
02:15of debt on the balance sheet. Cash and cash equips, $36 billion. And negative free cash flow was not
02:22as bad as expected. But everyone still seems pretty calm about that. If you compare that rate of
02:29leverage to other hyperscalers or the average on adjusted base in the S&P 500. How do you feel
02:34about it? I get you're looking at this from the equity side of the story. Yeah. But even on the
02:39debt side, we've seen over the last couple of weeks with the arrival of Astra from OpenAI,
02:43that's been well received. As you pointed out, that was trained at Abilene, Texas on Oracle
02:47infrastructure. OpenAI hitting $45 billion of ARR. You know, sentiment around OpenAI has improved a bit,
02:54therefore sentiment around Oracle's improved. So we've actually seen the CDS has come in a bit,
02:58the credit come in a bit for Oracle as there's been a bit more confidence. Importantly, the company
03:04has already said that CapEx will be peaking this year and next year, and therefore free cash flow will
03:09inflect higher really in fiscal 29. So we actually see them heading back towards free cash flow
03:15positive. If you think about it, you look at all the hyperscalers, Microsoft, Amazon, Google, Meta,
03:20you know, Microsoft has said they'll stay free cash flow positive. But for the others, you know,
03:24we're heading down into negative free cash flow territory. For Oracle, there's light at the end
03:28of the tunnel where, you know, we should be inflecting back towards positive free cash flow in the next
03:32couple of years. But again, the market, you know, wants to see more proof before it believes it.
03:37So you took us to tokenomics. I find this fascinating. You know, Astra was trained in
03:44the Abilene site. And if Astra is a commercial success, frankly, it's run from a token generation
03:50perspective. For Oracle, that's good, right? I think, you know, OpenAI with a $300 billion
03:58commitment to Oracle over the next four to five years, you know, obviously, if they're being
04:03successful with their models and they're being successful as a business, that makes them a good
04:09customer to have. Also, it's a proof of concept of Oracle's infrastructure that it works. Also,
04:16you know, we are seeing Oracle in the quarter, they had $10 billion of prepayment. So customers
04:22signing new contracts, they added $26 billion to their backlog. And a lot of that was customers
04:28paying up front for the CapEx. So again, you know, that means that Oracle needs to spend less
04:34of their own capital, they need to raise less capital from the market in order to finance that.
04:39It also is a validation of what they're providing. They're not just providing balance sheet of a
04:43service. They're not just a bank. They are providing services around the GPUs that customers find
04:48valuable, and they're able to monetize that.
04:52Stefan, you're global head of software research, and there was another earnings out overnight,
04:56which is Adobe. They gave a forecast that, you know, there was a range on the street,
05:00but it basically is disappointed. What's the Adobe story here to your mind?
05:05Yeah, Adobe, we're finally starting to see the cracks that we've been expecting for the last couple
05:10of years, right? So the RPO, the backlog, actually declined quarter of a quarter, which is very rare for
05:16Q3. The net new ARR was down 40% almost year over year. The core creative apps slowed to around
05:258%
05:25growth. So those concerns that we've been worried about for the last three years are finally starting
05:30to come through in the forward-looking indicators. And so, you know, this is a tough market. You know,
05:35obviously, you know, OpenAI just came out with the GPT images 2.5. Every day, it feels like there's a
05:41new competitor coming into the market more aggressively. So on the headlines, Adobe still
05:46doing okay. 12% revenue growth, 42% operating margins, trading on 12 times earnings looks cheap.
05:51But we know that revenue growth is going to slow here as they really push into freemium.
05:56So they're really prioritizing getting free users. They now have over a billion users in total,
06:01but that's coming at the expense of near-term ARR or near-term revenue growth.
06:07You have a new CEO in place. Let's see if he'll change the strategy. Obviously,
06:11he's not new to the company. He's been with the company for a very long time. And so the question
06:15is,
06:16what is going to change the trajectory of revenue growth for Adobe?
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