The Intrinsic Value Podcast 对 $ADBE 的判断变化

That's what we saw with Adobe, Lululemon, all of those companies.

one position that kept winning all of these capital allocation wars in our intrinsic value portfolio has been Adobe. We added to our Adobe position and I had to look it up four times already.

And I can also spoil that the first lesson we need to take from this is only double down when the stock is at least down 15 to 20% from our entry price because we kept buying in the range from 380 to 315 which looking back at it might have been a bit too expensive.

Yeah, it was it was probably early in hindsight and I agree that we could have done a better job at dollar cost averaging into this company. To be fair though, Adobe was one of our first additions to the portfolio and and we started the portfolio with 100% cash and only wanted to add to companies that we covered on the show incrementally.

So, there's definitely some subconscious pressure, I think, to allocate capital and not just sit on 80% cash or more for half a year or longer. And so when a company that I considered to be very high quality kept getting cheaper, I saw that as a better opportunity to allocate capital than to invest into other mediocre businesses that we didn't have the same conviction in.

So, I think I'm a bit more bullish on Adobe than you are, Daniel. And Adobe seemed significantly undervalued to me, even when it was trading at above $300 per share.

And at that time, the setup was that we were looking at a company with a price to earnings ratio in the low 20s, an incredible margin profile, high returns on invested capital, very substantial chunk of the business coming as recurring subscription revenue, and then doubledigit revenue growth.

And nothing about that has changed. For the record, the only thing that changed is the multiple the market is willing to give to Adobe and the narrative surrounding Adobe, right? It went from 22 times earnings to 11 times earnings.

But you've also sold most of that position. So, I'm curious to hear how you think about it and whether you disagree with my thinking here, Daniel.

I generally don't. But I think what changed for me is looking at so many different SAS companies and just realized that perhaps all of them belong somewhere on the two hard pile at least the ones that I couldn't understand because I don't have an insight as a customer for example and obviously we use Adobe almost on a daily basis but I also believe that we are not the sort of company that Adobe you know banks on for the next 10 or 20 years.

we're not, you know, this huge sort of enterprise customer that they need to sort of keep as a customer to still make their returns, their investments worth it. And also just where they have an advantage over what AI can do.

I feel like a lot of the tools that we use at some point, and it might be only 10 years ahead, there will probably be an AI tool. And maybe Adobe is the distribution for that, but maybe it's not.

And I feel like there's so many just unknowable things about the future that it's a more difficult bet to make than just a year or two ago. It's a much better business obviously than PayPal and probably also Lulu ever were.

And compared to those two, you don't see the disruption that everybody [clears throat] talks about when you look at the headline numbers. And that's just not the case for Adobe. Adobe has grown at about 10% per year over the last four years while the stock is down 70% since then.

And the main fear obviously with these businesses is that exactly that revenue growth will slow down materially in the future due to changes that AI brings. And when that fear exists, the multiple collapses and that's exactly what we have seen with Adobe as you just said.

the bull argument for Adobe is that most of its business comes from enterprise customers that want to have full control over the creative outcome. And that can only be guaranteed with Adobe tools and AI cannot do the same.

And the problems that I personally have with the position which is why I sold in the end mainly come from two things.

So first is what about all the customers that are not Hollywood studios or big creative studios. I just mentioned it the tip of the world and maybe also ad agencies. I don't think ad agencies have the same sort of love for the creative process and if they can use AI for a fraction of the cost that's what they will do.

And then second if Adobe loses the top of the funnel which are you know young professionals that will be a big hit for the company as well. So for years that's what build the sort of skill mode where you know young professionals preferred working with Adobe since that's what they have been trained on.

But looking at Adobe again, I mean, it's clearly not at the same quality caliber of Alphabet, of course, and yet it still is the market leader in its industry by a very wide margin.

And as you pointed out, there hasn't really been any deterioration in the financials. But I still don't really see any meaningful signs of disruption yet. Despite the headline numbers that look really great, you also have these AI native revenue numbers that have tripled year-over-year. And Fireflyy's AI creative app is nearing $300 million in ARR. And so all that looks pretty good.

And they're also fighting back on the lower end of things too, which you highlighted as a concern a minute ago. And so in their latest earnings call, they talked about this strategic shift to focusing more on premium users, which comes with incurring more costs in the short term because you're providing a lot of AI credits that you're not charging for. But it also shows that they're fighting to retain users on the lower end in the longer term.

So basically they had shared some guidance with Wall Street where the market was expecting them to raise prices on premium users sooner and they've decided to push back on that. And again, I actually see that as arguably evidence of them thinking much more longer term than making short-term decisions that would help earnings next quarter or the following, but might ultimately undermine the funnel that they've created and the flow of customers into their business.

And so we talked about the Alphabet comparison and I actually don't think it's a totally off comparison to make because just like how I thought Alphabet as the dominant player in search was best position to integrate AI into search and even though that wasn't a guarantor of success, it did give them a pretty competitive advantage.

I also think that we shouldn't dismiss Adobe's positioning and their ability to deploy AI tools at scale too. they sort of have the first shot at doing so. And if they don't do it well, they'll definitely lose market share to competitors.

And with the point being, new technology does not have to be a threat to incumbents if they manage it well.

And again, that's not guaranteed. There's lots of illustrations historically of companies that have failed to innovate around new technologies. But again, you do have this distribution advantage when everybody is already using your products. So if you can figure out how to bake in the newest technologies and tools into your products, then the risk of competitive disruption becomes much more minimal.

And Adobe still dominates distribution in the creative space. He used to hold Adobe and he sold the position and he said something that I found quite interesting. So I just wanted to quote him here. He said for now generative AI actually helps demand for Adobe as the initial AI images and videos still need to be edited using the company's sophisticated software tools.

Over the long term, however, we see a future where Adobe is rendered obsolete except for the very high-end use cases. Even if the impacts are many years away, we look to put our investment dollars elsewhere.

I think one last thing that I just need to get off my chest when we talk about Adobe is the management team.

Now Adobe shows a lot of them as well. I mean the CEO left recently without any successor. Then the CFO followed just weeks later and now you see this major shift towards users you just you know mentioned.

So perhaps I'm just personally too scarred right now from you know that experience to overlook those things. I mean talk about personal biases but I feel like all of that is looking somewhat odd.

And then now with Adobe, you have this legendary CEO retiring with no named successor yet. And even if that's perfectly explainable by something as mundane as the fact that he was just getting older, he's already led the company for two decades, the fact that you have the CFO leaving weeks later really couldn't have been worse timing.

But I don't know to some extent I see some resemblance here with Adobe's problem of getting this new generation of creatives onto its platform. other alternative metrics to look at although getting that data will be incredibly difficult might be the divergence between you know total seats and actual design agency output volume. So the ratio of paid corporate seat licenses which is how Adobe makes a lot of its money to the volume of creative assets produced. So, you know, if marketing agencies use external AI tools, you would at least get a sense of the potential future churn that you can't yet see just because Adobe has a lot of these long-term contracts.

In the end, Adobe is still a holding. I'm conflicted on it, but I also believe it is good value. Although the momentum is not in its favor, and I think we shouldn't be too affected by the price we paid for this company. I think we got just got to view it from today's perspective. And if you do that, you have a company trading at a forward PE of eight times. You still have phenomenal financials and many good reasons to believe its monopoly like position on the creative enterprise market is actually sustainable.

What we know for a fact is that the market rightly so is wary of turnover at the top of companies. And another yellow flag that we haven't pointed out today, but we should discuss is the lack of insider purchases too. Perhaps because you had these two at the top knowing that they would be leaving soon and that's why they didn't make any insider purchases. But as the stock has gotten torn apart, management has been happy to deploy the corporate treasury toward buybacks, which to some extent is reassuring. But again, they haven't been as inclined to buy shares with money from their own pocket.

And so if Adobe's business does decline long-term in this case, I probably wouldn't look back at the CEO's departure as having been the canary in the coal mine or maybe even the CFO's departure because he does have a background in the semiconductor industry and that space has absolutely exploded thanks to AI. So it wouldn't surprise me if he just simply had some FOMO and wanted to go back to the industry that he had spent the rest of his career in.

But really, the canary in the coal mine might be the fact that there's this lack of insider buying from the rest of the management team. That gives me some pause. And so, otherwise though, everything is so far so good with Adobe. And by definition, I do think you need to have contrarian opinions about the market to outperform the market. And that might sound like sort of a lazy defense for clinging on to a company that we have some anchoring bias with. And I wouldn't necessarily disagree with that, but I think the indicators that are driving the stock down are so speculative at the moment relative to how the actual business has been performing.

I certainly wouldn't feel good about heading for the exit at this point in time, but we'll definitely continue to watch this one closely. And you know, if we see data that materially changes our assessment of what's happening with the business as we saw with Lululemon, then we should definitely think about trimming or exiting the position. But for now, it definitely remains in the portfolio.

So I still feel very good about owning it and sooner or later I also in my personal portfolio will have a position again. It's more about what we mentioned today a couple of times which is opportunity cost. I needed some capital and you know I sold Adobe allocated that capital somewhere else but over time I will buy into it again.

And so it sort of complicates the signal we're pointing to with Adobe.

>> If I were going to recommend adding more to either our Adobe or Co-star positions at current prices, both are attractive, but I would probably prefer Co-Star.

Oh wow. Well, actually then should we add to it? I mean, if you like it more than Adobe, it should probably be at least a bigger position than 1.5%. And again, like part of why it's so small is that I wanted to get more comfortable with it. And I feel like I've done that. And especially now that it's lower. I mean, again, we've lost 25% from our entry price. I got to say, I feel a lot better about the opportunity here. So, what do you think about maybe pushing it up from 1.5% of the portfolio to maybe 3%. We've got the cash to do it. So, I don't see a reason not to.

And and we are already learning some lessons from our mistakes in the past, right, with Adobe. I think we said not to double down on any positions and said we've had at least a 15 to 20% loss, which was sort of arbitrary, but the fact that we're down 25% lower and you're more comfortable with the business than when we first pitched it.

You can point out all the yellow flags of PayPal and then you compare them to what we see with Adobe and if the Adobe investment fails, you can easily say that it was so obvious and we didn't learn anything from our PayPal mistake.