Adobe faces long-term valuation suppression from perceived AI disruption risks, limiting upside potential despite solid fundamentals.

Second subject up here we're going to talk about Oracle and Adobe. Their earnings have come out. I want to share my opinion and perspectives on if I like those stocks, if I don't, those sorts of things.

Next up here, Adobe. Listen. Adobe's a company you can generally count on putting up solid numbers, and this is exactly what they did this quarter. B grade income statement here from Adobe.

Revenue's up 13% it's good, you know, impressive number there.

It The issue though is total cost of revenue was up 19% for the company year over year. That's no bueno. You don't want to see that up 19% when your revenue's up 13%. Okay? So, gross profit grew 12%.

Good number, but it grew less than revenue, right?

R&D was up 18% for the company year over year, so that grew much faster than gross profit grew and revenue grew, right? Sales and marketing up 11%, so they kept that in check, that's good.

G&A that was up 20%, so that's a much much larger number than obviously 800 basis points stronger than gross profit was up, and uh 700 basis points more than than revenue was up, right?

So, total operating expenses up 15% for the company year over year, not ideal when your gross profit's up 12%, so operating income only ended up being up 8%, net income only ended up being up 3%, they're buying tons of shares back, so that helped diluted EPS that was up 11% for the company on a year-over-year basis.

So, the deal with Adobe here is and you know, this was a stock I owned, I decided to sell out of it, and very happy I did. It's just a stock that is stuck at low valuations. That's the deal with Adobe.

And I I you know, and that's why the stock was down today. It was down after hours. You know, the issue with Adobe is it's just they're going to likely come in and keep putting up solid reports, right?

But, solid reports is not enough to get the stock really moving in a major direction and get a re-rating in regards to valuation of this company.

Adobe used to be a company that could easily command high 20s forward P, maybe even in the 30s forward P, because it was seen as a safe business model that was hard to disrupt for the long term.

It's no It lost that. It's no longer viewed as that. And I don't see it getting that back, which is why I moved on from the stock a while back, cuz I'm just looking at it and I'm like there's no way they get out of this situation where everybody's like, "Oh, they're not going to be disrupted."

At the end of the day, more and more people that use, you know, Gemini to create images and do editing and things like that, and these other different products that are there out there, whether it be ChatGPT, or whether you all I don't even know if you can do that through ChatGPT, right?

Um Nano Banana, you can do it through that. Uh or you can do it through I mean, I'm sure you could do it through I mean, there's so many different services you can do this stuff through, right?

And so, at the end of the day, people are going to always be like, "Disrupt it. Disrupt it. Disrupt it." And they're like, "Yeah, it's not showing up in the numbers too much yet, but just wait. 2 years from now, 3 years from now, 4 years from now, it's going to" And it's going to constantly be fed out there, constantly be fed out there.

And that's going to keep the valuation that Adobe's able to command in a much lower place, which makes it, you know, hard to to get any real big money made on this stock, right?

Which if you're investing in individual stock, you want to make a lot of money. It's going to be very hard to make a lot of money in Adobe, unless they grow their revenues at such a fast clip that people are like, "Oh my gosh, like it's a game changer."

Or if they could ever dispel the disruption, but I just don't see them ever for able to dispel that and be like, "We're not being disrupted, right?" They can say it a million times, but at the end of day, people are going to be believe what they want to believe, whether it's true or not, it's their perspective.

And their perspective is long-term disruption here. Which means has to command lower forward P. So, a forward P Adobe is going to command is likely going to be in the 9 to 15 range, 9 to 14 range long-term.

And so, yeah, it's hard to make a lot of money in a stock like that that is going to trade at those sorts of valuations, right? And so, that's just the issue with Adobe. Good company, stuck at bad valuations.

And uh it's just is what it is, you know, nothing nothing you can do about it.