Adobe faces competitive and management risks, but its low valuation (12x earnings) offers potential upside if it maintains growth.

It's Adobe, ticker symbol ADBE. Rate the strength of Adobe's business, including factors like industry and competition. 10 is invincible, a one is hopeless. Both of you have sevens, Matt.

Yeah, I mean, Adobe still has a an enormous user base. It's a sticky user base. People who have used Acrobat, you know, you know, have the Premiere tools and all that, they'll they'll still use it.

Uh monthly active users surpassed 850 million. It grew 20% year-over-year, which is pretty impressive.

But, their moat is really being tested right now with cheaper AI-based tools like Canva. There's, you know, free tools out there. It's really testing Adobe's business right now, so that's why I can't give it higher than a seven.

Photoshop, Acrobat, Creative Cloud still absolutely load-bearing when it comes to creative work. Revenue still growing low double digits, but there's a reason there's a value versus value trap debate around Adobe stock.

Getting attacked even before AI from folks like Canva and Figma and now with the rise of AI image tools, just another challenger on the horizon. It's a business that is strong, but the moat is under pressure right now and that's why I give it a seven.

For management, a 10 is Warren Buffett, a one is Homer Simpson. Nick said a seven, Matt, you're at a five. Yeah, a five seemed like a natural fit because we don't know who their management's going to be.

Um you know, you so I went right in the middle. Uh both their CEO and CFO are leaving. Uh the CEO was a little bit more of an orderly and and expected transition. The CFO departure was especially surprising.

He left to go to Marvel Marvel Technology. Um until a successor is named for both positions and really proves themselves, there's there's real kind of leadership continuity risk here.

And that's why I just kind of landed in the middle. We don't know who the leaders are going to be at this time next year.

These are good long-term operators that have been smart with cash. Just authorized a $25 billion buyback. Buyback, but as you say Shantanu Narayen is stepping down as CEO after 18 years.

CFO is leaving. So, we've got transition risk right as they are facing the disruptions that we talked about earlier. I went with a seven. You could convince me to go even lower than that.

For financials, a 10 is a fortress. A one is yikes. Nick said an eight. Matt, you're at a seven.

Yeah, I mean highly profitable. They have great cash flow. The buybacks Nick mentioned you know, they weren't opportunistic. They happened when the stock was expensive. So, I would kind of push back and say their capital allocation hasn't been flawless.

You know, buybacks are nice when you're getting a good value. I can't really argue they did. They have they have a solid balance sheet, but it's not a fortress by any definition. So, I went with a seven.

I went with eight. Operating margins around 35% roughly $25 billion in revenue, 60% returns on equity, and really strong free cash flow. Modest debt with with good cash generation.

Financials are not the problem with Adobe. It is the direction of travel of those financials over time. I rated it an eight.

Hi Nick. Let's move on to valuation. How well will Adobe stock do over the next 5 years? How safe is it? 10 is a sure thing. One is a lottery ticket. So, I went 5 to 10% with a safety score of four.

And this is really where it gets tough, right? The stock is trading about 12 times trailing earnings, eight times forward as cheap as it has ever been. The market is telling you its best days are behind it.

I don't necessarily believe that Adobe goes away, but I don't think you can go out and and assume multiple expansion from here, giving the real challenges on the horizon and you know, real questions around what comes next for AI.

And I do think, you know, relative to something like Viva that we talked about earlier in a regulated industry where there's real cost to pulling out its software. I think it's relatively easier to pull out the types of creative tools that Adobe offers than than maybe other other software. So, I think Adobe is relatively more at risk.

Went 5 to 10% cuz I think they can probably grow their earnings 5 to 10% over the next 5 years and with no uh multiple expansion, that's the type of return you would end up with and uh but there could be more downside to come if AI continues to gain capability and disrupt Adobe's value proposition.

Yeah, I feel I'm the more optimistic one here. I said 10 to 15% with a safety score of five, but that's a 10 to 15% growth rate off of a pretty already beaten down level. Um Nick mentioned that the the company's PE right now is 12.

Uh the historical level, to put that in context, is closer to 40. Um so, it's still growing revenue in the double digits and even if its best days are behind it, like the market seems to think so, if it can modestly compete uh in an AI world, uh it could be a steal at this level, but there are some serious risk factors here.

Yeah, it matters if Adobe can grow even just a little, could be a steal. Question is whether whether it won't. They've given Adobe a overall score of 6.3 out of 10. Uh Nick sees no top hits and likes it at a 12X earnings, while Matt wishes Canva was public.