Adobe - Unbreakable or on the Brink? A view from its customers (Part 2/2)

Fair to say the Adobe post is getting a lot of heat ahead of Q2 Earnings later today [**Here's** ](https://substack.com/@durablemoatinvesting/note/p-201210183?r=8iygzz&utm_source=notes-share-action&utm_medium=web)[**part 2/2 of the free deep dive analysis**](https://substack.com/@durablemoatinvesting/note/p-201210183?r=8iygzz&utm_source=notes-share-action&utm_medium=web) into the bear cases, so you can be fully prepped >!TLDR is:!< *Part 1 - bull cases* * **Adobe’s stickiness in enterprises is huge** — its tools have been used daily for decades, even by those that hate the brand, and their file formats (.ai and .indd) are non-negotiable * **Retention rate remains at \~95%** — Creative headcounts are shrinking but it’s not weakening Adobe’s moat * **Nothing has to go right at this valuation** — it just can't go hugely wrong. 10%+ FCF yield and 25%+ of shares being bought back suggests big returns * **Competition is heating up** — to be expected as there’s huge margins up for grabs *Part 2 - theoretical bear cases* * ***Myth*** **busting bear cases!** 1. Adobe's customers are huge enterprises not beginners/freelancers ; 2. there are no signs of pricing power erosion ; 3. Adobe file formats are patented ; 4. Adobe doesn't need to get back to historical levels even single digit growth over 5 years would give huge investor returns * **What** ***could*** **slow growth?** low-end tools make a move to compete upward (e.g. Affinity) ; competition has been successful at taking share in certain tasks (e.g. Figma) ; headcounts will shrink and eventually that could catch up to Adobe seat counts $ * **The** ***real*** **risks to know:** consumption-based model destroys the quality of the business ; AI tools develop into full-stack automation loops ; competition takes share of individual tasks until Adobe ecosystem is no longer worth it * **The Adobe Killer?** The launch of Apple’s Creator Studio is probably the most worrying (if unlikely) prospect . *90% of Pro's use Mac's* , apps would make switching low friction. Right now, its limited and the low-pricing targets content creators -- will it stay that way? *My take from inside the industry* * **I’m willing to bet that humans will always be needed in creative work**. Perhaps even more so than in a world with AI agents. Creativity is a 12x multiplier on marketing spend. * **If humans are needed - Adobe is needed!** Barring HUGE changes in the competitive landscape which we should be seeing more signs of by now * Even a reasonable bear case valuation gets you to **\~$300 a share** , giving you a 20% margin of safety * **I'm buying buy NOT loading up the truck** . These next few earnings calls are crucial