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Earnings just dropped, and it was (mostly) more of the same from Adobe. Whether you think that's a good thing or a bad thing is basically a Rorschach test that shows where you stand on the "Adobe is/isn't getting disrupted" debate.
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Revenues grew 13%, or roughly 8-9% if you strip out currency fluctuations and the contributions from the Semrush acquisition. Not jaw-dropping, but certainly not bad. Margins were pretty much in-line, but GAAP margins took a write-down on an asset impairment. Given the size, it's pretty immaterial to the big picture of the quarter, and non-GAAP margins were largely unaffected. I know a lot of people here are allergic to non-GAAP figures, but it can be useful as a proxy for underlying earnings power, and is a pretty good estimate for "owner's earnings" after you strip out the SBC add backs. Basically, the numbers looked solid across the board. The story continues to be \~10% top line growth, stable margins, and a focus on buybacks (less so this quarter because of the acquisition).
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However, their CFO announced his departure from the company at the worst possible time. He's leaving to join Marvell technologies, a fabless semiconductor design company whose stock has gone parabolic and has seen a huge surge of new business from the AI boom. I don't think I need to tell you why this is a really, really terrible look for Adobe.
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If tomorrow's share price opens up where it currently is in the after-hours (about $207 at the time of writing), Adobe will have a market cap around $83 billion. In the trailing twelve months, they produced \~8.3b in free cash flow, after subtracting stock based compensation from the operating cash flow total. This is a 10% true free cash flow yield, with a balance sheet that has room for more debt if they choose to do levered buybacks like Salesforce just did.
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In all my time researching companies, I don't think I've ever seen a business trade at 10x GAAP earnings with a revenue or FCF/share chart like Adobe's, outside of cyclicals that saw an unusually long boom cycle. People like to bring up Meta in 2022 as an example of a stock that got impossibly cheap, but revenue and DAU's were literally in decline when the stock bottomed, combined with apple's ATT policy and the metaverse embarrassment. Adobe has seen very little deterioration in the fundamentals since the AI/competition threat really began, and definitely not any deterioration that isn't expected as they fight against the law of large numbers.
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This post was mostly a look at the numbers, and didn't discuss the qualitative aspect of Adobe's competitive positioning. There is obviously a huge debate about their moat, which will probably continue for at least another year or two. But as it stands right now, there is no credible evidence in the numbers to say that Adobe is getting meaningfully disrupted.
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I own shares and remain pretty bullish, so I'm curious to get feedback and see if I'm missing anything in the numbers. I'm also interested in any bears that have a compelling case against their competitive positioning going forward, specifically in the enterprise segment. And I mean an actual compelling case that amounts to more than "I cancelled my Adobe subscription in my photography business in favor of Canva, therefore Nike is probably going to cancel their 3000+ seats at some point soon."