$ADBE stock tumbled 17% on the announcement of acquiring start-up creative collaboration software company Figma for $20 billion, while its EPS of $3.4 beat the expectation of $3.33 by Wall Street. The stock has dropped 52% in the past year, and seems showing an entry point for those long-term investors.
I have been watching $ADBE stock for a while since the beginning of pandemic, when there are increasing demand for the creative software suite by creative professionals and social media creators. There are 3 bullish opinions about the stock:
- Adobe is building its monopoly in the creative world from content creation marketing services. Other than Adobe creative suite product line (Illustrator, Photoshop, After Effect…), it also extend to the marketing space through marketing automation platform Marketo and e-commerce platform Magento. Those extensive product lines strengthen Adobe’s empire and provide its customers more seamless experience, the data assets created in the ecosystem makes its clients more sticky to the platform (as the exiting cost would be high if they want to migrate to another platform).
2. The Saas model is another bullish point, as the recurring revenue makes future cash flow more predictable, and that’s probably one of the reasons that investor love this stock. Moreover, since a lot of Adobe software is industry standard like the PDF file editing software, and the creative ones mentioned above (such as Photoshop), the company has higher pricing power, even when inflation is high at the moment. While a lot of other companies like Walmart are suffering from increasing material cost and supply issue, Adobe as a software company does not have the same concern at all. By utilizing the power of internet, Adobe’s business is highly scalable and the growth can be exponential. From AI perspective, Adobe also has huge advantage to provide customized solution for its clients as it has accumulated the data for 40 years and the data become the truly gold mine of the company and created an wide economic moat, making it impossible for new start-up to catch up.
3. Last but not the least would be the acquisition of Figma, which adds the missing collaboration creative product lines to Adobe’s current ecosystem. Although Figma is just founded in 2012, it has achieved super growth in the past few years, and widely used by companies like Netflix, Square, Coinbase and Uber. It not just become a necessary skills for designers to include in their resume, but also widely used by product managers, project managers and marketing teams to collaborate on the project at the same time and enhance teamwork and efficiency. It could be a huge game changer to Adobe’s business empire and enable more monetization possibilities in the future.
However, there are also some bearish opinions:
- Some investors may think the $20 billion acquisition is too expensive and it adds burden to Adobe’s financial statement. As teh valuation of Figma is $10 billion, the $20 billion acquisition price seems a overpay for the deal. While the $20 billion will be paid half cash and half stock, the current cash balance of $5.8 billion would require additional loan to make the transactions, which is expected to close in 2023.
- Another bearish opinion is the digital experience is a contantly changing one and is very competitive and more and more start-up may pop up. Growth could be slower than anticipation and margin expansion may not be pushed as expective.
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