Adobe [SGO 8 – 6 April 2021]

They’ve empowered generations of creatives, videographers, photographers, designers, digital marketers, to do what they do and have been extremely sticky with their software offering. How does a company of this size continue to grow at 20% to 30% year on year? They are already a market leader for creative software, yes: Photoshop, Premier Pro, Lightroom. I’m sure you’ve heard all of them, but most significantly PDF! They have built PDF. 

Joining me today to geek out on this software powerhouse is Chris Susanto, founder of Re-ThinkWealth.com. We explore Adobe, which is the company that you may not be familiar with like I’ve said, but you have definitely interacted with their products at some point of your life. On top of their dominance in the digital media solution space, they are growing a whole new digital experience business, from PDF scan to e-signatory. They are finally monetizing PDF. On top of their cloud offering, I think there are a lot of interesting things going on in this company. They are just continuously transforming. 

For your reference sake, this episode was recorded on the 6th of April 2021 and released early to our community members. Our discussion today is solely for education and entertainment purposes only. It does not serve as any form of advice or recommendations. Thank you for loving what we do and empowering us financially to do more for you. Let’s geek out! 

Back with Chris today to talk about Adobe: the creative media software giant. They have been one of the dominant players in the game. Why do you decide that you want to talk about this company? 

Chris: First of all, it’s not financial advice, it’s for educational and informational purposes only. I’m very happy to talk about Adobe today. For my VI members, you can read up more detail in your monthly newsletter as well. Adobe is a very interesting company and as you say Reggie, if you talk about the software, you know what is it, right? Photoshop. Photoshop is such an icon.

Reggie: Even till today. Even with all these SaaS (Software as a Service) products out there today, Photoshop is still the giant. All the designers use Photoshop, Adobe Premier Pro and all that stuff. It’s crazy how strong their software suite is. 

Chris: Exactly, and I think what’s amazing about Adobe is that… I’m sure you’ve heard of the saying that those who don’t adapt, perish. So I think Adobe managed to adapt throughout the years, through the licensed model, like Microsoft through the license and they moved towards the subscription model online. They managed to come up with new offerings and they managed to bundle these offerings together. It’s really not just Adobe Photoshop, but there’s many other Adobe products that we’re going to talk about today. 

Reggie: Yes, and I think a lot of people may not know a PDF is also a part of Adobe. Everyone uses PDF. It’s like PDF is one of those software that you use and you never think of where it come from. You just use it like that’s the standard so that’s pretty cool. 

Chris: Exactly. PDF is something that everyone uses and I think it’s under monetized, in terms from the Adobe’s point of view. Generally, if you think about Adobe, what company is it? You should just think of it as a company that really provide the tools needed for the creative professionals, for the market peers, for the working people to create content, to manage document, for digital marketing, for advertising. All these tools and services really have just a very clear goal which is just to help to create, to manage, deliver, measure, optimize, and engage contents from multiple operating systems, media and device. If you think about it, they are quite focused and yet they cover many things and that is in fact what helped them to grow over the years. 

Reggie: You sound like you’re marketing for Adobe. They do have very good softwares, this one we cannot deny it.

Chris: Adobe has two main segments now. Last time, they used to have many more segments, but over the years, they take all these different products and they segment it and they called it into just two. The first is the digital media segment. The digital media segment consists of your documents like your PDF, Creative Cloud, your Photoshop.

Those are under the first segment and then they have the second segment. Their second segment is called the Digital Experience. First, it’s the Digital Media Segment, then the second segment is called the Digital Media Experience. From a long time, ago as I’ve shared at the start of this sharing, they made really smart decision to turn into the SaaS model even before the SaaS model was the common theme. That means, they were quite innovative even back then. I think it was in 2012 or 2013, they started switching.

Reggie: Back then, SaaS it’s a unique thing. Not every software comes out as success. So I think they… pretty advanced in that sense and it changes their business model. We can talk a little bit about this later, but it’s very interesting. It’s just kind of like how games does it. In the past, you had to pay one lump sum for game and now it’s a whole different ball game.

Chris: This allows them to scale better over time and you see that Photoshop has been around our life for so long, and yet they keep on growing. And yet, do you know that there are still some Photoshop customers who are still in the licensing model? They haven’t moved yet. 

Reggie: Legacy, guys. Legacy.

Chris: All the legacy customers. It’s not surprising that their digital media segment consists about 73% of their company revenue, but this 73% of their company revenue for the digital media segments… all your Photoshop, PDF but it consists of 80% of their gross profit and more than 90% of their operating profit. This means as of now, it’s still the digital media segment that is driving the value and driving the returns for Adobe.

It’s still likely to grow further, but of course you won’t see that kind of like 50% growth, maybe at most like 20% growth… somewhere along those lines is still quite doable for Adobe. I think that’s the big overview about Adobe and generally they still make most of their money from the America side. About 57% from America, only about 16% from Asia. 

Reggie: Really? I didn’t know that, but I do know their softwares are still extremely dominant. Most of my friends in the creative space, they all use Adobe softwares. But then there’s this other set of Adobe softwares that are pretty interesting, which is the whole digital experience. 

PDF scan. I don’t know if you use PDF scan. PDF scan is amazing. You should download the app. These days, there’s a lot of things that’s trying to go paperless. There’s this whole movement of trying to go paperless, but you still receive random contracts sometimes, you still receive like receipts sometimes and you want to document them. 

With the app, you literally just use your phone and you scan it. Immediately, it uploads on the Adobe cloud. You scan it and then it immediately transform into Adobe PDF. It looks like a scan copy. It looks exactly like a scan copy. You remember those days when you scan stuff? It looks exactly like that. Then you just upload to the cloud, you get the link, you can share it immediately. It’s pretty wild, the things that are trying to do. 

Chris: Is it free? 

Reggie: It’s free! Shit… exactly like what you say, right?. They are under-monetizing PDF. I don’t know… is that a strategy? Is that a plan? What are your thoughts on that? Because everything is free, a lot of things are still free under PDF. 

Chris: There’s definitely a strategy and there’s definitely a plan. I’m sure you know the common theme of companies, especially in the internet world, in the digital world that we currently live in, they are very careful not to monetize too fast and scaring the customers away. A very big example is WhatsApp. 

Reggie: Until today, there’s no real monetization. 

Chris: Exactly. That patience is really quite admirable. Of course, they can have that kind of patience because their advertising businesses is making a huge ton of money. Facebook have that patience. If you think about it, Adobe can have that patience too, right? Most of their business are still in the… Photoshops where they are really making good recurring income. In fact, I think most of the income now are recurring. That’s why I think Adobe have a very strong key competitive advantage because branding. 

You know Photoshop, you know PDF and they have a network effect. If you use PDF, you must send in PDF format. Of course you can change it, but people just take it as PDF format. Photoshop, Photoshop format, and if you want to [indiscernible] This is the network effect. There’s a little bit of switching costs as well. Of course, the branding is strong, it’s reliable, and customers do not want to switch. 

Reggie: Actually, when it comes to the digital media softwares, whether is it Photoshop, Lightroom, Premier Pro, they’re all taught in the design schools. In schools, they literally have modules to teach you how to use it. If you think about it, it is a downside, it’s a funnel. They give the schools free usage and then they teach their students. Everybody use it. It’s like dentistry, it’s like medicine. You teach the professional from the start and then they just cannot shake off that software because they’re just so used to it and it does wonders. I think that’s also quite an interesting take. 

Chris: Exactly. I think Adobe in my opinion really have some of the strongest moats or some of the strongest competitive advantages and some of the most durable ones, because they are really focused on the creative professionals and they make good products. They keep on updating the products. They already have a huge user base. It’s kind of like a natural stickiness to it and they keep on expanding new products. You know the CEO? I think we should talk a little bit about the CEO. His name is Shantanu Narayen. He joined Adobe in 1999. 

Reggie: 1999? 

Chris: Yes, 1999.

Reggie: I was seven years old back then. 

When he joined, his position was senior VP of worldwide development. You can see that he came in as a guy who is focused on worldwide development and then he was promoted first to COO, and then become CEO in 2007. Throughout the years, he managed to navigate the business model and the changing landscape of business very well. He was the one who bundled Photoshop, Illustrator and other products into one single creative suite in 2003. He bundles it. Even if you want to buy just Photoshop, you don’t mind paying more to get everything else even though you don’t use it. Maybe that’s the idea. I’m not sure, but it works, right?

Chris: He bundled it, he simplified it. Then in 2013, he switched to a subscription model. 2013 leh. At that time, it’s very advanced. Overall I think, the CEO had done a really good job in navigating Adobe throughout the years and I think they are doing the right thing. They are building the moat, building the competitive advantages over the years. But of course with such big companies, the prices are rarely very cheap or very mouthwatering. 

Reggie: No mouthwatering deals. Wait, but like you said, this is a very old company and they have executed pretty successfully. I think we all can agree that they’ve executed pretty successfully. But to expect them to continue to grow 20%, 30% year on year, is that even realistic? What do you think? Because everyone wants to say that they will keep growing like the next Amazon. That’s what a lot of people will say. Do you think Adobe being in a relatively niche environment selling these kind of very niche softwares can keep growing at 20%, 30% year on year?

Chris: To answer that question, we just need to look at maybe the past 3 or 5 years. What’s their growth rate? We can also look at their guidance and look at why they say so? I think in the past few years, they’ve been able to grow at about ~20% and for the financial year 2020, their financial targets was about… for the digital media segment revenue, they’re aiming to grow another 22% year on year, the digital experience side about 20% growth is their target as well. 

Coming back to your question, I think it’s definitely still possible. If you just look at Facebook, it’s already so big. But it’s still growing so fast. Why? These companies like Facebook, Adobe, Microsoft, Amazon, the reason that they can grow so fast is very simple, it’s because their business is also growing. Their business is not only growing because there are still untapped addressable market, but they are also growing new businesses in other areas that is adjacent to their current business model, and because they are so innovative, and they keep on trying new things. Somehow, they hit a new thing and then it grew. 

You know Facebook, they somehow get Instagram, then Instagram grew. Then WhatsApp, they’re still growing it. Amazon, at first they just sell books. Then they think, “Why don’t I sell everything?” Then from selling everything… “Why not I focus more on groceries?” They buy Whole Foods, then Microsoft… “Why not I do gaming? I have LinkedIn, I have Cloud. Why not?” 

Reggie: “I have GitHub. I do everything.”

Chris: Amazon also. “Why not I do cloud?” Suddenly AWS (Amazon Web Services) become one of the biggest in the world, or is it the biggest? 

Reggie: It is the biggest, >50%. They are still the dominant player and everybody ended up behind him, still cannot win. AWS is one of their biggest growth, biggest cash generator. 

Chris: Exactly.

Reggie: it’s pretty wild that way. AWS actually charges a premium for everybody that is not in the cloud computing space. AWS is one of the most expensive cloud service provider. They are not the cheap guys. They are one of the most expensive and yet they’re the biggest. 

Chris: Why? 

Reggie: Over time, they have created a lot of service support systems around it and they have a lot of updates. Some people talk about their market practice. They say they go to GitHub and whatever that’s popular, they would copy and then… you know because open source, right? They copy and then they make it better and integrate into their own stuff. That is an ethical challenge. 

Amazon Web Service is pretty wild. You know how crazy they go to? They go to this level of developing this thing called a snowball, I think it’s called snowball? Have you heard of that? 

Chris: No. 

Reggie: Essentially, what happens is you want to onboard all these clients that were having physical servers onto the cloud. To onboard them is quite a long work. You’ll have to have a whole team to go in to do it. So what AWS did… they literally transformed a truck. They transformed a truck into a digital storage thing and then they drive the truck to your office. They ask you to put the wire… put everything into the truck so they collect all the data directly onto the truck and then it sends straight into their cloud ecosystem. They send it back to their data centre and then they pump it down. 

So it’s like shipping things. That’s pretty crazy. That kind of service support and kind of onboarding process that they do on top of all the innovation and all that they are having. They charge a premium and people still use it. AWS is no joke. It’s quite interesting how far they have come. Everyone else… Today, not talking about Amazon. Since we talk about it, a little bit is fine. 

Everyone else, whether it’s Microsoft, IBM, Google, they are all trying to do niche. Google is trying to do machine learning. IBM is trying to do the whole blockchain. Microsoft, I can’t remember exactly, they have GitHub, Azure, all those sorts so it helps. But AWS does not need to specialize. They’re not trying to specialize in a market to gather customers. They have that whole suite and it’s pretty wild. 

A lot of my coder friends say it’s so much easier to just use AWS. Number one, they’re familiar. Number two, it’s very reliable because at some point in time, you need to know that for every second of downtime, it’s going to affect your business very seriously. So people rather pay a premium for reliability and all that jazz. 

Chris: Amazing. How about Azure? Have you heard of Azure? 

Reggie: Microsoft Azure? They are trying, but they’re still not there in terms of… 

Chris: It’s not like AWS. 

Reggie: It’s not like AWS. Azure is interesting because a lot of enterprise software that use the Microsoft backend has to be on Azure. If not, there’s some licensing fee that needs to go into it. It’s a bit interesting. We can talk about Microsoft another day. 

In Adobe, they also do this whole cloud thing. At this moment in time, we can classify their business like you said, in two segments: the digital media, which is all that jazz about Photoshop, Lightroom and all that, Digital Experience with Adobe Scan and Adobe Sign and all that. I’m a little interested to find out why the digital experience part is not garnering a higher growth rate? You look at HelloSign, DocuSign, which are the leading competitors in this space, they are growing much faster compared to Adobe as a whole when they talk about the digital experience. They’re not growing as fast. Did you have any thoughts on that? 

Chris: It’s probably because they are not as strong in terms of their differentiation and competitive advantage in that segment as compared to their digital media segment like Photoshop. Because if you think about it, who can fight Photoshop? Nobody. That’s why it’s growing fast even after so many years. As you said just now, there’s lots of other competitors who are actually… if you think about it, it’s more focused in terms of sign than Adobe Sign. The whole company name is DocuSign, their full focus is on signing while Adobe’s still a bigger company. 

Why they are not growing as fast, even though they are starting from a lower base, it’s probably because there’s more competition and also because of the fact that their competitive advantage is just not as strong in that segment as compared to their digital media segment. 

Reggie: Fair, fair. Do you think that such a space with all this digital softwares is a monopoly eventually? Will it become like one person eat up the whole business of signatory or is it going to be multiple players and Adobe can just be one of the players inside although they may not shine through, in terms of being the biggest e-signatory company or their digital experience may not grow into another big segment, compared to their digital media.

Chris: I don’t know in detail about DocuSign etc. From what I know so far, it seems like it’s not just going to be like one big player in the market. There’s going to be a few really, solid players, high quality players who really provide good products at good prices. It’s like Grab. You have Grab and Gojek. Then you have ComfortDelGro also. I’ll say DocuSign is much newer than Adobe and there’s also many other companies that are focusing on the e-signing business. I think eventually, there’s going to be a few good players and I don’t think there’ll be one that have 90% of the market share or things like that.

I don’t think so, but each of them will have their own strength just like… adobe Sign will have their own strength because people already use PDF. That is one huge advantage that Adobe has because they own the core software of PDF. If people have PDF and Adobe makes it easy for users to sign with PDF, then why do you still need to use DocuSign? But of course, if they don’t allow people to use PDF to sign with DocuSign, they cannot not allow because there’ll be anti-trust and things like that. 

Reggie: These days, the integration matters. For a lot of people, if you can integrate a lot of things, it helps rather than… Of course, the other side will have their own story. Like Apple, no integrate, everything in their own ecosystem or like Tesla trying to do their whole ecosystem on their own. Not everybody wants to integrate, but I think there’s two camps. Seems like Adobe is falling into the “I will integrate with everyone” kind of camp. That is interesting. 

Chris: Yeah I think each company have their own strategies and each strategy has their own drawback. At a certain point of time, it will be a combination of not integrating and integrating. For example, Facebook, right? If you watch news in Facebook, you will still be in Facebook. If you watch video, you’re still in Facebook when you watch the videos but they do have certain feature that allows you to download all your Facebook data and for you to delete Facebook if you want. Just that it’s harder to find. 

Reggie: I didn’t know that I could download everything and delete Facebook because exactly what you said, they try and make it very hard for you to delete. It’s the same with a lot of other softwares these days. The delete button is there, but you have to jump through like maybe five tabs before you can get to that delete. 

Chris: You have to Google how to delete then I think once you decide to delete, you have a grace period. If you regret it, you come back, something like that. Yeah, it’s a combination. 

Reggie: We make Adobe sound so sexy and like no competitors and all that shit. Actually I believe, that there are certain competitors in the space for sure. Who do you think are Adobe’s competitors based on the businesses that we’ve talked about?

Chris: We’ve talked about Adobe being a company that is helping marketers, that’s helping creative professionals and they provide the tools and services to really help them to do their job better, be it to market better, design better, etc. I view the companies that could compete with them and potentially already start to compete with them are companies who have the same target market and companies who have the ability to… because they have the same target market. They also have that kind of ability to create a product or new service that could compete with Adobe in a very big way as well. 

Some of the companies that I view as competitors are like Salesforce. Even though now, they are more like focused on selling and marketing, but they can always introduce a new product that targets these customers, since they already have the customer base any anyway. Autodesk is a company that is less well-known. Have you heard of Autodesk?

Reggie: No. 

Chris: It’s less well known, but I found out this is a company that helps customers to design, model and render their artwork. 

Reggie: Wait, is that software AutoCAD? 

Chris: I think so. Yes, it’s AutoCad. 

Reggie: Everyone knows AutoCad. Everyone that does 3D modeling in architecture, they all use AutoCad. Okay, I know. I just didn’t know there’s a mother company called Autodesk. 

Chris: They’ve been around since 1982 and they have over 4 million paid subscribers.

Reggie: What!? Four million people use AutoCAD? I’m pretty amazed.

Chris: They have over 4 million paid subscribers. If you look at the financials, it’s quite decent. These are the companies where not many people talk about, but you know they are there. They’ve been performing quite well. Of course, DocuSign could fight with Adobe Sign and Microsoft for sure. With Microsoft Teams and all the integration and Microsoft Powerpoint etc, they can continue to innovate and offer creative solutions to these creative professionals and marketers.

If you look at all these companies and you compare them side by side in general, I think Adobe and Microsoft, I would say are the more stable one because their EPS (Earnings Per Share) have mostly been positive over the last 10 years, not even one year slightly negative. Even Salesforce being a very big company, Autodesk and DocuSign (the newer one), it’s not as stable in terms of the earnings. In terms of the EPS compounded annual growth rate over the last five years, can you guess what is Adobe’s EPS growth rate over the last five years? It’s quite shocking.

Reggie: I don’t know, how shocking? Like 50%? 

Chris: Yeah. It’s actually close to 50%. That is crazy shocking for such a big company. 

Reggie: For such a big company since 1990 something. 

Chris: No. In the recent years, over the last five years. 

Reggie: Crazy. You will account that to the transformation into their SaaS software business? 

Chris: Everything, their SaaS software business and growth of their SaaS software business, as well as their other new products like Adobe Sign etc. All those translate down to the bottom line to the EPS. Adobe is not a company where you see negative earnings. Their earnings are positive and growing at about close to 50% over the last five years. DocuSign is still negative. 

Reggie: Growth, growth, growth! Cannot compare side by side like that, but I get your point. 

Chris: Salesforce and Autodesk, it’s not so stable, but their growth rate has been really high as well. Autodesk, about 52.7% over the last six years. Salesforce, about 81.54% over the last four years. These companies are still growing very fast and Microsoft about 30%. In terms of return on equity, Autodesk is the highest but it’s quite unnaturally high. It’s close to 300%. I think it’s because they have lots of debt. Return on equity have the base as equity. 

In terms of these software businesses, once they’ve grown to quite a mature state or a state where they’re not having negative income all the time… if you see their business model, once they’re at a scale, it’s actually very, very profitable. Adobe’s return on equity is about 44%. That is crazy high. Microsoft, about 40%. Gross margins… can you guess what is Adobe’s gross margins? It’s quite crazy too.

Reggie: Like 80%?

Chris: Yeah. It’s around 80%. It’s like Facebook level, 70%, 80%. 

Reggie: Crazy. 

Chris: Yeah, that’s crazy and that is quite indicative of the business that they are in, the software business. Even DocuSign is close to 75%. Microsoft, being so big, is about 68.38%. It’s quite crazy and their gross margins is very strong. Of course, the smaller companies have a much lesser net profit margins. If you look at DocuSign, it’s still negative because the earnings are still negative, but Adobe’s net profit margin is about 40%. 

Reggie: It’s huge. Are they the highest amongst the people we’re comparing? 

Chris: They’re the highest. Very solid. Retained earnings out of total assets is even more ridiculous. It’s about 82.13%. That means they really use very little assets. Let’s put it like that. 

Reggie: Which means their business is this big, but their cap assets are very, very small. 

Chris: Yeah. Very small. Crazy good business, right? I think this is one of the more amazing thing about Adobe. Out of every $1 of retained earnings, their assets is actually only slightly more than $1. That’s crazy. That is the definition of asset-light business and a business that has asset light and yet such a strong competitive advantage… really churning out so much money and so much earnings. 

Adobe is really a strong business and they have actually quite a high overhead ratio, operating expense to revenue of about 51.32%. Microsoft has the lowest about 27.84%. DocuSign spends about 82% of their revenue for operating expense. 

Reggie: The reality is as these SaaS guys grow, as these companies grow, their overhead don’t grow in the same rate. Usually the revenue grows much higher and then there’s the whole hockey stick exponential growth that comes along with it. Over time, it gets to a much larger scale. Overhead will then come down which we can see from Microsoft. Hopefully, Adobe will also continue to grow their top line so their overhead will come down. But for companies like DocuSign, they’re in the early days. Although we keep poking them, they are young and need to hire all these people to do the work.

Chris: Definitely. You’ll be surprised to know even DocuSign have a positive free cashflow now. DocuSign’s current free cashflow is positive and it’s higher than it is three years ago, the same with the other five companies that we are comparing. They are actually still… I mean it shows that their business actually can make money. It’s just whether they can retain the customers and really grow their business or not, which Adobe have shown that they are able to over the last two decades.

In terms of the debt, DocuSign has the highest debt to equity, about 2.2. Autodesk is about 1.696. Autodesk is much more leveraged than Adobe and Microsoft. 

Reggie: It’s exactly what you said, right? 

Chris: Yep. Their return on equity is not very natural for Autodesk, but if you look at whether they can pay off all their long-term debt with their net income, DocuSign’s current income is still negative. But Autodesk can actually pay off all their long-term debt with their last 12 months net income in about 1.36 years. It’s not in any danger of not being able to pay back its income at all. 

For this kind of companies, we want to look at whether… especially for DocuSign, if they have enough cash to pay off all of its long-term debt. DocuSign currently don’t. They only have about $0.79 out of every $1 of their long-term debt. Adobe have about $0.84 cash out of every $1 of their debt. That’s a very big amount for such a big company. 

Reggie: That means they’re spending a lot also, like they’re reinvesting and building and all that jazz. They’re not keeping things in cash. Is that what I’m hearing? 

Chris: Yeah, they are paying the people, they are paying for new business growth, but at the same time, you must make sure that you are not in any danger of not being able to pay off your debt and your interest payments etc.

All these companies, I don’t see immediate danger, but of course for companies like DocuSign, it might be more dangerous if your business cannot eventually sustain in a way that make decent income to cover all your long-term debt.

Basically, if you look at it… generally, companies like DocuSign, they are still diluting their shares. They have been issuing new shares and their shares have actually been higher than it was three years ago. 

Reggie: They need to raise funds.

Chris: Yeah, but for Adobe, Autodesk and Microsoft, their current shares is actually lower than it was five years ago. They’ve been buying back shares and that helps the existing shareholders. For Salesforce, their current shares is essentially 40.78% higher than it was five years ago. They’ve been diluting shareholders. For Salesforce… which is not a good sign. 

Reggie: I think also something to note is for a lot of these SaaS companies, if they’re trying to grow into new spaces, they need a lot of capital upfront. It’s not always a bad thing to be diluted in that sense, especially when it tends to have a premium. SaaS companies tend to be going at a premium relative to their value or if you really want to calculate what is the intrinsic value of the company. In that sense, it’s all a growth strategy, ultimately whether they can grow or whether they can pay it down or whether they can buy it back, I think that’s all that matters. 

Chris: Yeah, I agree. Ultimately, they cannot go bankrupt. That’s their first goal. They cannot go bankrupt. If they need to issue shares like AMC. 

Reggie: Dude! I think the AMC guy is smart. I think he’s so smart. If I was a GME guy, I would also issue more shares, but I think it’s floating at such a premium. You don’t want to issue then what do you want to do? You issue, get the capital and then you can go and do all your expansion and strategies and all that jazz.

Chris: Exactly. It’s a self fulfilling prophecy. 

Reggie: Exactly! 

Chris: It’s like every company is good. 

Reggie: All these retail investors… I do think it is a retail pump. All these retail investors, they really want AMC to grow. So then, you as AMC CEO… “hey, faster man. Let’s sell more shares, get more capital and let’s find a way out of this mess.”

Chris: Exactly. 

Reggie: It’s pretty cool. 

Chris: I have no judgment about that and I think it could be a good strategy. That’s why investing is not black and white. That’s what makes it amazing. In general, if you look at the numbers, Adobe seems to have the best numbers out of all the other companies but if you look at the rough valuation… if you just do a simple DCF (Discounted Cash Flow) model and if you view maybe 20% free cashflow growth for the next five years and then 13% for the next five years with 5% perpetual after that, right now they seem to be around in the fair value range based on the assumptions.

Of course, if you have worse assumptions or better assumptions, then the value will adjust accordingly. Just to note, their free cash flow actually grew at close to 30% over the last five years. 29.35% over the last five years. That’s really… 

Reggie: These guys are making money.

Chris: Yeah, really amazing growth. So I think overall, Adobe is a company with really strong and quite durable, competitive advantages because they have good management, good CEO that has been able to change with the business environment and they have been able to innovate quite well and compete quite well, and they have been able to really utilize their base of customers very well too.

Reggie: Yeah, and it helps that they are not making the media cycle. All these SaaS companies, because they are so big already, people don’t talk about them. Oracle, Adobe, a lot of these guys, they are like so dominant in their space. They have softwares that the whole industry uses, right?

If you look at Oracle, the whole hospitality industry uses Oracle Suite. I’m not sure you know, but in digital marketing, in design and all that… design specifically. Design, Photoshop, editing and post-work, everybody uses Adobe. I do think that because they don’t really make the media cycle, they’re not as attractive and so their evaluation tends to be not as pumped up in my view, relative to a lot of other SaaS companies. It’s very hard to find fair value for software companies. 

Chris: Yeah. Adobe have grown about 5X in the last five years. That’s amazing, right? Their earnings is going to come on June 10 so you can look at it. In general… 

Reggie: Not a buy/sell call, but yes, I am long Adobe. I bought Adobe a few years ago. 

Chris: Oh, you have Adobe. That’s cool man.

Reggie: That’s why I can have this discussion with you. 

Chris: Yes. Good choice, good choice. 

Reggie: Cool! To end off, could you help us paint a little bit of a summary? Where do you think this company will grow? What are some of the overall risk factors and what are some of the growth opportunities in Adobe as a company?

Chris: Yeah. In terms of where they could potentially grow is that of course, if they can manage to grow the digital experience segment better, they can grow Adobe Sign better instead of just relying on their traditional Photoshop etc, then they could really push Adobe to a new growth segment. 

Of course, there are risks in terms of the fluidity of our current environment for all the software businesses where if another software businesses can do the things equally well as you at a better price, then I think they can take market share away from you.

Now things are moving so fast. All these big companies like Microsoft, Salesforce, they do already have the skill. They do already have the customers. If they can do what you do better, then they could easily take away market share from you fast. Of course, there’s that risk but I think Adobe has so far been doing quite well in fending off competition and strengthening their moat. 

Reggie: I think in the creative suite side of things, which is the Adobe digital media side of things, you are seeing smaller SaaS players come in, people like Canva… or many other software companies to be exact. They’re trying to do small little parts of replacing some of the lower level design and template stuff. But I think at this moment in time, based on my understanding of people in the creative space, the product is still relatively superior. 

The other closest competition will probably be Apple and its suite of GarageBand and all those kind of stuff. But you know Apple being Apple, it’s a closed ecosystem. In other words, saying that Apple… everything out of Apple, it’s still quite an Adobe ground. 

Chris: Yeah, I agree. 

Reggie: Nice, nice. Great! Thanks for coming on. Thanks for sharing and I think there’s a lot more to talk about in terms of the product, in terms of how these products will go along. In that sense, we really got to see how it plays out in the market, who uses what and see the growth rates. 

For a lot of investors that are not specific in the space, there’s a limited understanding of the products itself. Comparing it to other people and see kind of adoption will be a pretty interesting way to understand this business. But yes, not a buy/sell recommendation. Must keep saying, must keep recommending… but yes. Must keep saying… keep reminding. Thanks for joining us today to talk about Adobe and hope you stay healthy. See you guys soon. Take care.

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