Adobe Systems (ADBE)

ADBE has been on a roller coaster in terms of investors’ sentiment in recent years, starting with the Figma acquisition, which made investors question ADBE’s competitive position. Then, the AI theme caused investors concern over whether it was a tailwind or a headwind for ADBE’s business. That being said, ADBE’s management is committed to applying AI to ADBE’s solutions, and the operating results have not been affected yet. We think  ADBE may offer an attractive entry point for investors to average into the name, but we would size the position conservatively given the risks.
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She trimmed Abobe, because her position was large. The stock came down then up. There are questions about whether AI will disrupt it.

What often happens in tech AI is initial excitement over a company is replaced by a show-me attitude. This happened last week. Last week, their earnings were pretty good, but guidance was tepid, so shares sold off 8-9%. He exited some weeks ago when tech dipped. Nothing is wrong with Adobe, but the market got fearful.

Yesterday they reported and shares fell 8.5% today. Results were terrific, but guidance for the quarter was a tad light. There were many price hikes and hope heading into the quarter. The bulls got way ahead of themselves. He would pounce on this current weakness. The quarter was strong across every major business line with no areas of weakness. They beat top and bottom line. The key cloud metrics were strong; net new digital media annualized recurring revenue strongly beat. Q4 guidance wasn't "that" soft, but he would shake off fears, because of currency fluctuations and a few major deals closed early, intended to happen the next quarter. Also, they are spending more on marketing because they have new express software for teams, students and enterprise. More important is their guidance, which we'll have to wait until December. Adobe has done so well for so long and their AI products remain compelling and their complete AI suite is amazing (he uses them). Past post-earnings slumps have been great times to buy.

The quarter was good but the outlook was muted. EPS was $4.65, beating estimates of $4.53. Revenue of $5.4B beat estimates by just under 1%. Adobe's guidance for its Digital Media unit's net new annual recurring revenue (ARR) of $550 million was around $11 million below consensus, which is likely due to a strong beat in 3Q, which outperformed Street expectations by $44 million. The 3Q metric was driven by the close of certain transactions that would have otherwise secured in 4Q. There was also a sense a bit of caution in the outlook, given heightened geopolitical uncertainty and lack of clarity on interest rates. The Digital Experience segment is another area where there could be continued pressure until 1H25, as more clarity emerges on enterprise IT budgets. Adjusted operating margin was up only 20 bps to 46.5% -- in line with expectations -- as Adobe ramps up investment in GenStudio and Adobe Express. Not great, but still a great company. HOLD.
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Is up only 8% in the past year. Underperformed. Yes, AI cannabilizes their existing products

Made a buyer's list today. The stock is enjoying a run. Its software and design software has been in a slump, but is starting to improve and looks good looking forward. People will look to this if they move away from stocks that are just AI. This is a name to own if there's a soft landing and not a severe recession. They've been investing a lot in AI which will improve their products. She's confident.

Has relatively attractive margins and been growing their topline, but she isn't sure they can maintain their growth (driven by gen-AI) or margin. It trades above 30x forward, and isn't sure they can maintain that.

Adobe knows how to monetize AI, so it's a good way to play AI. It was held down, but it's now marching higher as it should on recent earnings.

He's concerned whether their products will be cannabilised by AI itself.

He regrets selling this way too early and expects it to come back this year based on their AI-driven software. But he wouldn't build a huge position.

Software has been under pressure. Adobe peaked over $600 when the application side of AI was all the rage. But their last quarters haven't shown that they have monetized AI as quickly as the street expected. Well, these things take time. Now is a good opportunity to enter this. The excitement of AI won't be chips, but how AI will be applied--Abobe.

Hasn't lost market share in graphics. AI benefits haven't come through in earnings, so stock sold off, but they will eventually. Very reasonable valuation for a double-digit grower. He's actively buying on this pullback.

ADBE’s share price has been under pressure recently due to a combination of AI uncertainty and weak earnings from CRM which affected most SaaS companies. ADBE is trading at a 23.7x Forward P/E, which we think is a very attractive valuation for a high-quality business. We believe if investors are bullish on one name, the proper course of action is to stay the course and ride along with it, as the share price reaction after earnings is highly unpredictable - if the share price goes down and its fundamentals remain unchanged, investors could average into the position.
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They have the best creative software suite, but it's very expensive. That's their problem, but he has faith that the CEO will figure this out.