Chit Chat Stocks - What Does Adobe's Next Decade Look Like? With Leandro from Best Anchor Stocks (Ticker: ADBE)

Episode Date: October 13, 2022

Adobe operates through three segments: Digital Media, Digital Experience, and Publishing and Advertising. The company recently acquired Figma, a collaborative design platform, for $20 billion. Listen as Brett and Ryan ask Leandro questions about the company, its business model, and valuation. Enjoy the show! ***************************** Interested in becoming a member of 7investing? Subscribe with code “MONEY” and get $100 off your annual subscription for life: https://7investing.com/checkout/ ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Leandro's work? Follow him on Twitter here: https://twitter.com/Invesquotes?s=20&t=ANL_r8vtQfEea5vzrh1vWg Contact us: [e-mail] Timestamps Adobe | (4:20) Industry | (16:12) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today's our Thursday deep dive interview where we have on an analyst to discuss a single stock. And today we're talking about Adobe with Leandro. You may know him as InvestQuotes on Twitter. He has been on the show before. We talked about that at the beginning of the intro. So you might recognize him, but a really good analyst. And Adobe was a lot of fun to talk about since it's kind of a controversial stock right now, but one of the best performing stocks of all time. Did you have any highlights from the interview? Yeah, I think there's three highlights that came away from maybe just more information I learned about Adobe. One, why they have such a strong competitive advantage.

Two, why the Figma deal might make sense and why the regulation outcome or regulatory outcome is kind of a big deal for the company's long-term trajectory or maybe just long-term, you know, holding on to that competitive advantage. And third, the maybe underrated growth potential of the experience and analytics part of the business, which a lot of people maybe, I don't know, just don't think about very often. All right. Before we get to the interview, we do want to talk about our sponsor, our only sponsor exclusive, 7investing. You want to talk about them? Yeah. So 7investing, as you may have heard before, since we've been talking about them, they do seven stock picks a month. And on top of that, they also do their 20 highest conviction stocks in their strong buy portfolio. So as of right now, they have over 200 active 7investing recommendations, but that is kind of hard to parse through. So to look at their strongest conviction ideas as of this moment, they update each quarter their 20 best ideas.

they just released this as a part of the 7investing subscription and they have released short reports or not, you know, not short selling reports, but small reports to go along with each. And along with this portfolio, you can track how it's doing versus the market. And I think it's a great way to kind of see, okay, you know, we're not just giving out these research reports. We're kind of telling you what stocks we think are very attractive at these moments. So if you want to use our code money, M-O-N-E-Y, you get a hundred dollars off your annual subscription. And you can take a look at these strong buys right now, along with all the other stuff that goes along with a 7investing subscription that is $100 off your annual

subscription or 25% off. And that is for life with code money, the link and the code is in the checkout. On top of that, we'll be having a longer discussion with 7investing founder, Simon Erickson at the end of this interview. So after all this stuff with Adobe is over, if you're more interested in 7investing. You can hear from the man himself, Simon Erickson, who founded the company after the outro music. All right. Without further ado, here's our interview with Leandro. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital,

and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. All right, welcome in. Today, we are joined by Leandro, now second time guest, I believe. No, third, third. Third time? I think so, yeah. Constellation Software and, oh wait, maybe I'm mixing. Leandro would know

is it second or third I'm actually I actually think it's third time but I cannot remember what it was besides Constellation Software I know we had

if anyone's interested in Constellation Software we had a great episode on them earlier this year but yeah I can't remember what the other company was

I will look that up while we're recording but continue Ryan we'll call it second time for the time being but you may know him as at invest quotes

on Twitter he's also the writer at Best Inker Stocks on Seeking Alpha. And today we're talking about Adobe, which has kind of been in some, I guess it's kind of been in the hot seat as of late, thanks to sort of a big acquisition. But before we get to that Figma acquisition, let's talk about the company. What sparked your interest into looking into Adobe? How'd you come across it as an investment? okay yeah before before answering the the question i think the other company was asml

maybe that's right i just looked it up i was going to save it for the end but yes anyone interested asml constellation software i think those um yeah still be relevant today go check those out in our archive feed but yes continue mandro okay going back to the to the question well i was i was looking for software companies that had some kind of mode that went beyond technological leadership. Because I'm a bit wary of modes that come only from technology. I think a tech gap can close pretty fast. So that made me search for companies that had some kind of technological leadership, but also another mode or competitive advantage that was protecting the technology leadership. And that made me come against companies like Adobe,

Autodesk that I think I don't know if you guys I think you guys know Autodesk or Intuit which I think enjoyed competitive advantages that go well beyond the technology that underlies the products so in my opinion the first trade one has to look at when searching for software companies that with this competitive advantage that go beyond technology is how they have fared in the past because if there's a software company that has been able to survive the test of time then that's a pretty good indication that there's something besides the mode. So, for example, Adobe and Intuit, they have managed to survive for more than three decades and their margins are still top class. Their return on capital is pretty high. So clearly competition is not having an easy time eating in their returns.

So, yeah, that's how actually I came across Adobe. I also studied Intuit in depth, and I'm actually looking at Autodesk now because I think that if you can combine software with another kind of mode, then that can be very powerful. But if it's just software, then I'm a bit worried about the mode because, I don't know, a 10-year timeframe is a lot in technological terms. Especially with all the money that pours into software. Yeah. And just for reference for listeners, Adobe is one of the best performing stocks of all time. I'm looking at the chart now and I believe it's over a thousand beggar. So over a hundred thousand percent are around that return since inception. So if that's not a good indicator of business quality, I don't know what is.

But let's get into what the company actually does, because people know it as, you know, the PDF company and kind of the creative cloud company. But they have a ton of different products. So what are the various segments and what are important for each? Okay, so Adobe has three segments, two of which make the majority of revenue. The two most important segments are digital media and digital experience. In digital media, you have the creative cloud and the document cloud. And then digital experience, you have the experience cloud. So, well, the third segment is publishing and advertising, which is like a bunch of legacy software products that are making every year a smaller part of revenue.

But I think to understand Adobe, it's better if you look at the clouds and not at the reportable segments. So I'd say it's better if you look at creative, document, and experience cloud. So the most important by far is the creative cloud. Right now, it's the largest. There are a bunch of products included. I think it's actually like around 31 products or so. So it's quite big. you can find here famous products adobe products like photoshop lightroom or premiere photoshop is

obviously photo editing that that has become a verb and then you have premiere that is video editing so in creative cloud you basically found find any product that is used by creative users to create and edit digital content in any kind of in any kind of format basically you've got photo editing with photoshop video editing with premiere and then you also have 3d editing with a company that adobe bought not long ago called substance i think i think we've got our audio editing software is included in there as well and and we'll talk about it we have the bundle as well so you know we like using the digital signature but i think that might be the the big bundle but either way continue so this is the create cloud which makes like a substantial part of revenue

it's what Adobe is known for. Then you have the Document Cloud. Adobe is also known for document management because they basically invented the PDF. So Adobe has for many years been adding what management calls verbs to Acrobat. That is the product that they sell for PDF management so that users can freely manage and edit documents. So in this segment, you can also find other offerings such as adobe sign which makes like obviously makes total sense that you can buy adobe sign in the document cloud but adobe is also transitioning to a full document management offering such as similar to what docu sign is trying to offer it to offer but to be honest adobe is not quite there yet and adobe sign is somewhat more commoditized that what you can

finding a full document management offering. And then finally, you've got the Experience Cloud, which is also made up of many individual products that help customers distribute personalized digital experiences. So in the past, customers had the Creative Cloud to create digital content, but Adobe's management felt that they didn't have the end-to-end lifecycle of that digital content that was being created because a customer would create something and then they would take it elsewhere to distribute it so adobe started to buy a wide variety of companies the first one was omniture that was an analytics company and they started to build this experience

cloud where customers would be able to create digital content using creative cloud products and then distribute that content using the experience cloud without leaving the adobe ecosystem okay makes sense and you you wanted uh when we were talking before the show you made sure we wanted to talk about experience cloud i know you just touched on it but which of these segments do you think has the most or the largest opportunity i mean creative cloud i think comprises the majority of revenue right now do you think experience cloud could eventually be sort of a second pillar there well i think creative cloud will continue to be the most important segment for many years, especially because now we have a large influx of new creators

thanks to the creator economy. So now Adobe with a Creative Cloud is not just catering to professional creators, it also caters to individual creators. They just rolled out a product called Adobe Express, and I'm actually a user of that product. It's basically the same as Canva. I think people would know Canva and maybe not Adobe Express because it's fairly new. But I think the Experience Cloud offering is a bit undervalued by the market because it's growing slow. It makes not a big part of Adobe's revenue, and it's growing slow. So people are saying, well, that's not working because at this stage, it should be growing very fast. But that's a consequence of how the Experience Cloud works.

So Adobe caters to very large enterprises with this offering. And these enterprises, they cannot just say, okay, I want that software, I'll buy it. They have to basically transform the tech infrastructure so they can install these products in-house. So for example, if you're a company that has a website and you want to know all the analytics and you want to buy the experience cloud, it's not as simple as saying, okay, I'll buy Adobe Analytics and then I'll be able to see everything. know you have like to tag your whole website so all the data goes to adobe and that takes like a

lot of time and a lot of money so we're talking i've worked in a project where we used adobe analytics and to implement just this product it maybe takes one or two years and maybe double like 10 million of project to do so so it's not something that the enterprise customers can switch to very fast so that's why i think we're seeing very slow growth right like it's not slow growth still double-digit but i would expect expect better in the future and that's because many customers are starting with analytics and then when they have everything like everything is focused on that analytics product and all the tech infrastructure has been adapted then they start purchasing rest of the products and we are not there yet like many companies have

one product, but they still don't have the remaining 10 or 12 products. So I think it's actually a segment that we will see accelerate in the future. Okay. Let's talk about pricing then. How does Adobe price its products? I imagine a lot of the value or a lot of the competitive advantage is that there's competing products for a lot of Adobe's offerings, but there's maybe not as anywhere near as good of a bundle? There's not one. Yeah, exactly. So can customers bundle

and do they have to bundle or could they just buy a singular product? Yeah, so pricing differs slightly across the different segments. So in Creative Cloud, someone could buy the entire Creative Cloud and for around, I think it's $60 a month and they would have basically access

to the plus 30 products that Adobe has. Or you can also buy products individually. Like if you just want Photoshop, you can buy Photoshop. I think it's $20 a month. You can bundle like, there's sort of a personalized bundle, but you cannot decide it.

Like I cannot choose to buy Photoshop and Premiere. So Adobe will tell you, okay, do you want the photo editing offering? Then you can buy Photoshop and Lightroom for $40 a month or something like that. But as you can see, if you're going to buy Photoshop and Lightroom for $40 a month

and the whole Creative Cloud is $60 a month, what Adobe is trying to do is to make everyone buy the Creative Cloud bundle. And even if you go to Document Cloud, that is somewhat similar. You can buy Acrobat Pro for, I don't know, I don't remember the price right now, but you can buy Acrobat Pro or Acrobat Standard

that is cheaper but actually if you buy the creative cloud it comes with acrobat pro so everything in the digital media segment leads you to buy the creative cloud subscription because it's like the price point is it's not worth it to buy the products individually so when you have more than two products then the creative cloud is going to be worth it so and then in the in the digital experience segment is it's much more like opaque because it caters to enterprises so it's not like an individual can go on the adobe's website and say hey i want the the experience cloud how much is it so that's i think that would be set on a case per case basis and but those contracts if you're a very large company you you'll go into the more than 10

million a year to have the whole experience cloud. This episode is brought to you by ourselves. If you're hearing this now, we know you're a Chit Chat Money listener, but if you want to get more than just our free episodes, you can become a Chit Chat Money Plus subscriber. Within the subscription, members get access to our weekly, not so deep dive episodes, our monthly episodes detailing one of the holdings in our investment fund, Arch Capital. And then they also get written work. So newsletters and research files to go along with each not so deep dive episode. Am I missing anything? We should talk about the themes that we do each month. So each month we choose a theme based on whatever we want. So last month we did video games. This month we're doing

housing. Next month we're doing engineering software, I believe. And then the following month we're doing website and e-commerce software. We choose those because it's, you know, a great way to investigate a different industry. And if you want to subscribe to CCM+, go directly through Apple Podcasts or Spotify or through the link that will be in each one of our show notes. It is only $5 a month. You heard that right. $5 a month. Perfect to try out. If you like what we have to offer, we hope you'll subscribe. Okay. Now, we may be hitting this a little bit late because we're kind of talking a bit of the history here, but let's talk the industry dynamics. I mean, The revenue growth has been generally consistent over the last few decades, which is just highly

impressive. I mean, we talked about how good their stock returns have been. I mean, what are you looking at for whether this can continue over the next decade? Because I think that's kind of the big question. How mature is this, you know, the creative cloud market, the digital experience market, all that good stuff? Well, revenue was actually kind of lumpy before 2012 because the company was actually a product based company and not a subscription based company. So what happened is that in the year

2008, in the global financial crisis, Adobe's revenue actually dropped significantly. And Shantanu Narayan, the current CEO, has just been named CEO in 2007. And he didn't like at all what he saw because it was not a predictable business. So they started because, well, what happens when you have a product based company revenue model is that when you go into a recession, then customers are going to defer the purchases because Photoshop version one might be okay to do their work. And maybe you just release

Photoshop version 1.1, but they don't want it. So they started, Adobe started to transition to a more predictable model and transitioning to subscription to software as a service. So software as a service

brought more predictability and higher growth, actually, because now before you had to pay, I don't know, if you wanted Photoshop, you had you had to pay one thousand or two thousand dollars and it was like one time payment you got the software and then you installed it and now you can pay twenty dollars and you have the software so maybe over the life that you're using that uh that product adobe is making more

or less the same money but for the cost like customer point of view is much more like it's cheaper but it's not it's not cheaper but it's it's easier to buy so to say so the the thing is that adobe has seen strong growth but it hasn't grown it hasn't grown too much on price so it has more it has grown more on volume and and this despite having what can be considered a monopoly in creative so this is great because now adobe has like a huge install base and they can actually take quite a bit of price i mean if you are um as i don't know a creator and you're making $3,000 a month or you're a creative agency and you're making a lot of money from these products, $60 a month is a very tiny part of your total cost. And these are mission-critical products.

So they can actually take quite a bit of price increases. But I think that this is what has happened in the last decade. And I think the next decade will be different because during the last decade adobe was growing mainly with creative professionals so there was there was obviously more content being created online so the creative industry was was booming now it's different because the boom is coming from non-professionals due to the creator economy so everyone is creating digital content to for the online economy like you've got influencers or you've got actually like myself that i'm working every all the work i do your work also is digital content so you you're going to have to go for a different type of customer and i think it's going to be a bit

more difficult so adobe is coming out with products such as adobe express because canva is now so famous in the non-professional community that you have to fight like you are not the incumbent anymore you have to be sort of the disruptor in this in this segment so it's a good opportunity because you can grow a lot on subscribers but at the same time i believe that monetizing this user base is going to be much tougher. Before Adobe Express, I've used Canva for quite a while and I've never even thought about paying. So I think it's going to be quite difficult to monetize these users, but it's still an opportunity. And the thing that I'm most bullish about is the Experience Cloud because we are in the very early innings of that offering.

So I remember listening to a podcast with Robert Smith, that is the founder of Vista equity partners where he said that the next inning in software is analytics so before we have all the coding and everything was getting super efficient and now you actually have to measure what comes out of that and act on that to keep improving and adobe has positioned itself like perfectly for that with the experience cloud there's only like one large competitor which is salesforce and salesforce is two or three years behind in the experience cloud offering and they are also missing their creative cloud offering, which doesn't allow them to do an end-to-end offering. So I think I would say that creative cloud has growth drivers for the future. It will definitely

be tougher. But I think experienced cloud, besides having growth, is going to allow Adobe to build another mode besides creative, where the historical mode has been. okay you mentioned that when you're looking at software businesses you don't just want the best in-class provider technology wise you want some sort of other competitive advantage for adobe what do you think those big advantages are okay i think it once again like like in every business that has several segments it varies a bit per per segment but looking at the grand scheme of things i definitely say that the combination of creative and experienced cloud will be an important competitive advantage going forward like enterprise customers don't like

complexity complexity is basically killing large businesses so i understand that in the future most of them would prefer to have a one ecosystem where they can they can create the digital content and also distribute it and measure it and then act on that like the other you could also have adobe creative cloud and then distribute that content in on salesforce for example that but i don't think that's going to be like really a thing for very large customers because they are basically going to offer something very similar and then you're not i don't think adobe is going to make it easy so that you can distribute their content with other platforms so then more more specifically if we look at the different segments if we look at creative i'd see the the competitive advantage

advantage lies in adoption like in it's a fairly similar dynamic to autodesk so adobe's products became a standard in the creative industry so students were somewhat forced to learn how to use them because they knew that the creative agencies would demand them like if you were going out of university and you wanted to be a creative professional and you wanted to get a job they were going to ask for photoshop like that was going to happen so and actually universities had the creative cloud for free so they were teaching you how to use the creative cloud at school so i think that's very similar to what autodesk did since the beginning um management is very are well very well aware of this so they keep targeting educational institutions so that they

keep working with the creative cloud then on document cloud i actually i still don't see any strong competitive competitive advantages so i would say that if they offer a full document management offering like docusign is trying to do then that could cement strong competitive advantages but i don't see just how like maybe they have sort of a competitive advantage in the partnership with microsoft because acrobat comes installed with windows so that's that gives adobe i think a couple of billion uh users which is like very it's a significant opportunity but i don't see how it differentiates against other offerings and then on the experience cloud i think that the mode is still being built but i expect it to be quite strong because the closest

competitor, as I said, is Salesforce, but it's still behind Adobe. And this is going to have pretty big implications for the future because if Adobe wins a large enterprise customer with the Experience Cloud, the switching costs are so, so high that Salesforce is going to have a lot of trouble going for those customers. If I'm spending two years implementing the Adobe Experience Cloud and it's working just fine, I'm not going to spend another two years to switch to Salesforce. course in fact one of i have a friend that worked for accenture and he he worked in implementing the adobe experience cloud because actually accenture is um like a partner with adobe so they sell the experience cloud and then they they also sell the project to implement it and

accenture does that and he told me that in four or five years he's never he's never seen any customers switching from adobe experience cloud it's just so hard to switch and if something goes wrong, you're basically losing all the data because with the Adobe Experience Cloud, you're able to personalize, like to build a real-time customer's profile. So if you switch out of the Experience Cloud, then you have to start from scratch and companies don't like that. So I think there's no mode there yet because it's still very early innings. But if Adobe still stays two or three years ahead of Salesforce, I think it's going to

be a very strong mode of switching costs yeah i mean that sounds like phenomenal switching costs let's talk about what i think a lot of listeners have maybe heard about recently that is the figma deal um first off i guess let's just go over generally were you surprised by it overall thoughts of the acquisition um how could it work how could it fail all that good stuff and ryan and beyond just overall thoughts what is figma i think a lot of people don't know what figma is OK, so Figma is a company that was actually only competing with one of Adobe's products, that is Adobe XD, that is to create user interface and user experience designs. But what Figma had different to Adobe was that their platform was real time and collaborative. so you actually it was on the web so different creators could be in the same document working

at the same time and even non-designers could be looking at the work and putting comments on it and adobe didn't have that so even though it didn't like it's not a major competitor for the creative cloud it's just with just with one product but this strategy like adobe knew that the the design like the creative industry is going towards collaborative and also towards including non-designers in the workflow and adobe didn't have this they were actually trying to pivot to this with things such as photoshop on the web and also adobe express which is also on the web but It's what it was like being very slow. So I think that's why they ended up like bidding for Figma.

I was, I must say, I was actually surprised because I had underestimated a bit like the thread that Figma was to Adobe. Actually, it was, it was quite funny because if you went into Figma's website, you could see how they mentioned Adobe, like saying, okay, if you want to do, if you want to design in UX then do it here but if you want to edit a photo go to Adobe so they were like actually admitting that they didn't have a 360 degree solution for creatives but at the same time they were saying in this product like to design this we are much much better so I think that was the the main like point why management adobe's management went to to acquire um figma i think

it's obviously expensive i think 50 times annual recurring revenue is expensive however you look at it especially in this market like i mean if you purchase if adobe would have purchased figma for half stock with a 700 stock then one could say okay yeah they're buying figma and it's expensive but they are paying also with an expensive stock but they were actually doing doing it when they were close to 52 week uh lows so that that was that wasn't great but i must say even though this is anecdotal like since adobe announced the the deal the stock has come down like 30 or something like that so actually the acquisition now it's three billion less because it's fixed shares so delusion is not going to be like if adobe manages to not repurchase the

stocks that they are going to issue, then it's going to be a bit better than the $20 billion. So I don't think the Figma deal can be looked at from a purely ROI perspective. So if an investor measures the Figma deal based on ROI, well, they are going to be disappointed because even if Figma grows very fast, I doubt Adobe will see any meaningful return in the coming years. However, what the Figma deal has bought Adobe, I think it's more time to compound capital above its cost of capital. They basically bought a monopoly

for five to 10 years more. And I think that's something that you're never going to be able to take into account in the return equation, so to say. So imagine that by buying Figma, the creative cloud is able to grow faster or maybe it doesn't deteriorate and it keeps steady growth.

then you're not going to take that like into the numerator of the figma deal but that's actually a benefit that adobe is seeing and they are not going to disclose how much of the creative cloud growth in other products like photoshop is coming from buying figma so it's going to be basically impossible to know what the return on this thing so i think that's something to take into account i think as an asset figma is great but probably not worth 20 billion and when i say probably i I mean, it's not worth $20 billion if you take the asset by itself. But if you take the asset and what it means to Adobe and how it's going to impact the different areas, then I think that it might be worth it. And I think something I read the other day that's also important in an expert call is that Adobe might have been bidding for Figma with a close competitor.

And they mentioned Salesforce. So Salesforce, we mentioned before that they only have the experience cloud and they are missing sort of a creative cloud. So they were maybe trying to go for Figma to complete that offering. And obviously Adobe could never let that, like an asset such as Figma end up in Salesforce.

So I think that might have played that and also that Figma didn't want to sell. Those two things also made the price come up. So I think it has to be looked at from a strategic point of view more than from a financial perspective, which obviously from a financial perspective, it will never make sense. Okay, so a couple of follow-ups. You mentioned, I guess you mentioned that it isn't worth $20 billion on its own, but it potentially adds more, it's almost more valuable as a part of Adobe. is there any sort of do you think this like how does adobe benefit beyond or how does figma benefit being a part of adobe is there any benefit to them yeah like figma now has basically access to a

global sales force and before they didn't have it so now an adobe has a huge install base in creative and actually what adobe sells in many cases is complementary to the to what they to what figma sells so imagine that adobe gets adobe xd i don't know if they're gonna do it do this but they discontinue adobe xd and they offer figma in the creative cloud then figma is going to be have a huge install base because a lot of people are going to buy the creative cloud or or they already have it and but i think the obviously the the benefits are going to be like greater on the other side like how adobe benefits because figma also i think one of the most important things is that figma brings a lot of non-designers to adobe like adobe you basically had designers

using the creative cloud but two-thirds of figma's users were non-designers so for example the project manager that is overseeing the business team the developer team and the design team he was also a figma user because he was collaborating with the designers in real time so now adobe is going to have like adobe's target customer just grew a lot because now they're going to be able to put all these non-designers into the mix and if adobe is able to pivot all the all their offerings to like imagine the creative cloud in the future is on the web and real-time collaborative then that's going to be a huge boost to to sales and also on the pricing side because now now you're going to be able to raise prices much much faster like figma had a free whatsapp

freemium offering um so now that you don't have that thread then if you raise prices where are going well where are adobe xe users going to go to figma well figma is yours so you can raise the price there. Figma has said that they're not going to raise the price, but I want to see if that stands true like two years from now. Right. And one more follow-up on the Figma deal on real time collaboration. If Adobe say, I don't know, five, 10 years from now, you can see kind of how the whole user base is going to real time collaboration. Do you think that widens the moat uh just because of a you know higher switching costs better maybe even network effects you could describe it as with everyone on there does that help compared to how everything's

kind of isolated with some of the products today i think it actually deteriorates the mode a bit like if everything if everything goes to on the web then switching costs are going to be and and I think the most important thing is that the industry is pivoting towards AI. And so like simplifying the life of the designers, like you're going to, I don't know what, maybe before to 20 or 30 clicks to do on Photoshop. Now with AI, it might take two clicks, making the products easier. And if you guys hold Autodesk,

you might know it's not great for the mode because then if you don't have like a learning curve then you can switch much easier than if you have a learning curve like you've been using photoshop for five years and you know how to use it perfectly but if someone can learn to use photoshop like in one month then the switching costs are much lower so i think adobe 100 had to jump into the collaborative and real-time trend but the age the ai trend is going to be a bit, I think it's going to be a bit difficult to tackle because the mode will shift from a learning curve

or high switching costs. It will shift a bit to technological leadership, which is what we talked about before, that it's like, you might be very good at AI, but another company can come and get up to date much faster than if someone has to learn Photoshop for five years. Okay, last question on Figma.

Um, and I know we've, we've kind of harped on it a lot, but my, when I looked at Adobe before the Figma deal, I thought, wow, this is a business with an incredible moat. And then when I see the company have to pay $20 billion to essentially fend off a competitor, it makes me question that moat. Does, does that concern you at all? And what's the risk that they end up having to do this again down the road? well it's not the first time adobe does this but um maybe at this scale obviously it's uh it's the first time i think management was clearly complacent like they they allowed figma to grow

too fast and to to a very big size like they could have acquired figma in 2021 maybe like even making a large offer but paying less um i think it shows that the mode maybe is not as strong but at the same time if this deal goes goes through it also tells investors like hey look we we might like we overpaid for this but we are protecting our mode for many years to come and if we can continue doing this and maybe the price the 20 billion in 10 years makes sense then i see it as a just another acquisition like many companies there are a lot of companies that have strong modes that acquire smaller competitors and they'd say no it's a talking acquisition to complement my offerings but in many of those cases they are also acquiring

companies because there are threats like visa mastercard like when they see a threat they will actually go for it. Maybe they'll get blocked or maybe they will not buy it, but they will collaborate. So I think it's something similar. So one could argue that Visa and MasterCard by doing this are showing that their mode is not as strong because if not, you can just say, like, I don't worry about competitors. They're not going to eat my lunch. But then blockchain comes in and they start to collaborate with blockchain to see how it works and to see how they can adapt to it so i think if you are able to do it then i don't see it as a concern but if you're facebook then yeah it's a concern because they're you're not going to be able to acquire

even like a 20 employee company so but in this case if i would say that if it doesn't go through it's a huge concern like if the acquisition doesn't go through the regulator um then i would most probably be like my conviction would be lowered a lot because adobe is saying hey look we have a threat and we're not we are not able to eliminate it but as long as adobe says hey look we have a competitor and we just eliminated the the threat for the next five ten years and now we're going to accelerate our our revenue then for me that's somewhat fine right okay now we met you mentioned management a bit there but any other thoughts on management anything you think is important uh do you think you know the ceo who i think has been there since 2008 as you mentioned

uh is very important to the story yeah i think i like management to be honest now they they're getting like not very nice comments by the investor community and i can understand why so shantanu has been at adobe for a long time and he guided the company through the global financial crisis. He led the transition to software as a service. So I believe he's a visionary too, because he bought Omniture, what's now Adobe Analytics, when basically no large company was going for that market and you had a lot of small players. And now he's built the whole experience cloud, which is positioned for strong growth for many years to come. So I think organic investments have been really good. If we go into capital allocation,

yeah it hasn't been great like um they have bought a lot of stock and they don't do repurchases like they should be done but i feel that there's not many software companies that actually do repurchases as they should be done because they they use the excuse that they are buying back stock to offset dilution from the stock-based compensation like that's you can read that in every 10k of any software company and well i think if i see people doing two things that i don't think should be done together they adjust free cash flow for stock-based compensation but then they complain when that cash that they subtracted from free cash flow is being used to buy back stock i think you shouldn't do the two because if you are already adjusting the free cash flow

metric for the stock-based compensation you're basically saying okay i assume that even if the company is issuing stock they're paying it with cash so then you should be fine if they spend that cash and buy back the stock regardless of price and and like if they can offset the delusion so if you look at adobe's free cash flow margin it's super high but if and then if you if you uh take into account stock-based compensation then it's fair it's not like super high not like in the 40 but it's 20 something like that so i think that's something that should be taken into account and i think the the company has made some good acquisitions others not so good but it comes back to what i to what i told you before like it's impossible to measure how good the acquisitions

are when you are bundling them in in some of the clouds like i bought they bought omni tier and then they bought also a company called magento that it's for um a small and medium-sized business e-commerce like it competes with the likes of shopify and stuff and that's in the experience cloud so how can you measure how much is like magento doing like maybe you have a company that just came to the experience cloud because my like because you have that product and then they are buying a lot of different products. And you're not taking that into account in the return for that company, but it should be there. Makes sense. All right. Let's talk about, I guess, we've hit on the business a lot. So let's talk about the stock. The

stock is down, I guess, 50% from a year ago. And this is kind of regarded as a really high quality business. What's the valuation look like? How do you think about the valuation today? i know the figma deal kind of complicates things but i guess just generally what are your thoughts on valuation well i think it was definitely overvalued last year and now like you have to add to the fact that it was overvalued and like you have rising interest rates which that's not something like that's not company specific it has come down substantially i think there are a lot of fears of adobe being cyclical um but i think it's somewhat similar to digital ads like there's no there's no way of knowing if it's actually cyclical because you know how like another

example another example in 2008 adobe obviously suffered but it was product-based business now that is um like a subscription business then how is it going to react and a lot of these people depend on these products to continue like uh earning like their their revenue so i think that also puts downward pressure on the stock i think um the digital experience like experience cloud is not going to be very very cyclical to be honest but creative cloud could be cyclical that's still like we still have to see and i think that the valuation for me seems fair now But I see a lot of people comparing Adobe's multiples to what they were 10 years ago, or maybe, I don't know, 20 years ago, just to see where the average lies.

And I don't think that makes sense for any company, but for Adobe, even less so. So Adobe 10 years ago was beginning the transition to software as a service. And so how can you, they didn't even have like a strong experience cloud. They were just starting to build it up. So you're basically comparing two different companies. So it doesn't make sense to do that. I think, to me, if I'm honest right now that I'm still building my position, I don't care if there's more downside ahead.

And there could be. And I am not any good at TA, but the stock seems to be holding up quite well lately in the general scheme of the market. Obviously, it has come down a lot, 30% drop after the Figma news. And I think the most crucial person, I don't think you can look at this from a valuation perspective until you don't know if the Figma deal closes or not. If the Figma deal closes, I think it's fairly valued.

But if the Figma deal does not close, I would say that Adobe has lost an opportunity to continue like protecting its monopoly and that will be definitely reflected in the multiple all right last question here we talked a bit about the downside risk so we don't hit anything we've already discussed but anything we missed on what could make i don't know any risk to adobe's business over the next year is canva a big risk i know you said that's only a small part so maybe is that overrated uh but any other risks out there um actually i think i saw i also saw canva like a significant risk but after the if the figma deal goes through for me the risk is a bit reduced because adobe can invest a lot more like in sales to sell adobe express and

now they would have like a product that is collaborative and on the web which is what uh canva has so for me that's somewhat reduced i'd say there's a side effect from the acquisition And it is that billions are going to be poured into the creative industry after seeing what Adobe can pay for a company such as Figma. And what it did for the VC returns. Yeah. They have now a lot of money and they're probably going to reinvest it in creative offering because it's probably the best trade

they've done in their lives. So I think that will surely bring in the future a lot more competition and adobe's management is going to be like it needs to be more aware of what's coming and identify these threats earlier so that not only so that it's cheaper but also so that it's not seen as a threat for regulators like look what happened with facebook and instagram at the time everyone was like oh yeah like they don't even like have revenue do you pay what you want and buy it and now the regulators are like oh maybe we shouldn't have like approved that instagram acquisition so i think like if you pay 20 billion for a company regulators are surely going to say

well 20 billion is a lot but if you start purchasing companies that may seem like a threat even if the company will was not going to become a big competitor but if you have to pay i don't know 500 million just do it the regulator is going to allow you to do it and take that off the market and that's it so i think that's going to be a risk in the future like the future the risk of a future figma and that's going to come maybe not not for the next couple of years because figma actually grew very fast in the last year but figma is actually a 10 year old company so it's not like they started and in two years they ate adobe's lunch like they took a decade to do so all right well i think that's all the questions we have i think that covers adobe pretty well

for anyone that wants to keep up with you. Why don't you remind listeners where the best place to do that is? I'd say Twitter, at InvestQuotes or Seeking Alpha at Best Anchor Stocks. And so those graphics you make on Twitter, those are using an Adobe product? Actually, they're not

because they're using an app for the iPad that allows me to draw it with a pencil, like with the Apple Pencil. But I have done quite a bit of the graphics. For example, what you saw in the Texas Instruments write-up, those graphics were made with Adobe. Okay.

All right. Well, that is going to do it. We want to remind our listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Money It's not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast.

Thank you all for listening. We'll see you next time. Hey, Simon, we wanted to ask you a few questions about 7investing so listeners could get an idea of what they're getting. what inspired you to start the company and what exactly is sub-investing well hey ryan thanks again for having me you know we from years of working in the investing industry it was inspired by conversations with people that would just always have kind of the same negative perception of the stock market right it's it's too hard or i don't have time for this for this to stack

against me and those conversations kind of led me to say hey we need to create a site that actually does inspire people to say, you can take control of your financial future. You can invest in stocks. You can find good stocks to buy and hold for long periods of time. And at the end of the day, too, we know that everybody is different. We don't believe that there is one stock that fits for everyone, right? Maybe you're a dividend-loving, paycheck-cashing income investor that might want an option that's going to be a lower-risk dividend-paying stock, especially right now with the economy being what it is. And then other people might say, hey, I'm ready to hold on for 20 or 30 years. I want to take some swings for the fences. Let's go after those high

growth opportunities. And so I said, this would be something that would be even more fun rather than just doing educational and by myself. I said, what if I brought together a team of seven advisors, all with a diverse background and a diverse perspective of the stock market so we could uncover more stones and look at a bunch of different stocks with a bunch of different investing styles in a whole bunch of different industries. And so 7investing is kind of the genesis of all of those that we started in March of 2020. And we said, let's look at a whole bunch of different stocks. Let's do the legwork of the analysis. And let's present our seven favorite actionable ideas every month for investors to choose from. And let's start the conversation

about which of these stocks is right for you and which one might be the right fit for your portfolio, knowing that investing is a very personal thing. All right. If you are a subscriber of 7 Investing, what do you get? Can you give an overview of what subscribers get? On the very first of every month, Brett, we release our seven new recommendations. So we are coming up on October 1st here, at least in the recording of this. And on October 1st, we'll release seven recommendation reports. Some of them will be low risk. Some of them will be high risk. Some of them will be biotech. Some of them will be financial services. We run the full gamut. And as a member, you get immediate access to all of the new reports. But you also get

access to all of our old recommendations as well. We track all of them in real time on our scorecard at 7investing.com slash recommendations. And we also provide company updates on all of those previous recommendations as well. We check in on how things are going. And sometimes we even see red flags that we think people should be aware of. There's risks for any opportunity at the time that you recommend it. And sometimes it's really needed for investors to kind of understand the risk and reward relationship. And then the last part of it is, in addition to issuing new recommendations and providing updates on them, is we know that this is a long-term journey. We know that investing is something that we want to take years, if not decades,

to accomplish whatever we want to get to as the end goal. And so we always, every month, make it a point to be very available for our subscribers to ask us questions. We have a members-only call right in the middle of every single month. We have a community discussion forum that we have available 24-7 to not only talk to our advisors, but also other investors. I think that's one of the key differentiators for 7investing is that we know this is a long-term journey. We know it's a very personal thing. We know they're going to have questions along the way. We don't want to just broadcast stock picks and disappear. We want to be here with you throughout this entire journey.

And you mentioned, so seven recommendations each month. Sometimes those might be repeats, But obviously, there's a lot of companies now in the 7investing universe. So how do members get a grasp on the advisor's conviction around certain ideas? Like which ones do they have a way of knowing whether advisors like certain ones more? That's the most common question we've gotten actually since we started is what's your favorite ideas right now? You know, we've done the diligence on almost 200 unique companies now and put them on the scorecard and people would say, hey, this is too much to keep up with. How do I even know where to start? And so we've kind of evolved as a company.

One thing that we've started doing is best buys every month. Each advisor gets to pick any of their or another advisor's previous recommendations and put the flag on it that says this is my best buy for October. And we publish those for subscribers. The other thing that we've started doing is issuing conviction ratings on companies that are also right there on the scorecard. So if you see a previous recommendation, we go everything from potential sell, which is the most negative flag we can put on a stock, to strong buy, which is the most positive bullish flag that we can mark things with. And you can filter through all of those to really quickly see here's some of our favorite opportunities. And we've taken this even one step further now, Ryan, which is we've created a strong buy portfolio where every quarter now we've gone ahead and self-selected as a team through a pretty methodical process our 20 favorite ideas, our 20 highest scoring companies that we've collectively come up with, our favorites of the entire scorecard. And we put these into what we're calling a strong buy portfolio that we publish each quarter, also available as an added benefit for no extra charge for seven investing members.

All right. Last question here. What does it cost to become a 7investing subscriber? And as we'll talk about, or we have talked about before, if you're a listener, use code money to get $100 off your annual subscription. That's right. We do have a monthly option. You can come in and check out the entire scorecard for a month just to see what you're looking at for $49 a month. But our most popular plan is actually the annual option because it's at a discount to that. In fact, we've got a discount on the discount, like you mentioned, Brett. $399 for the year is our annual option price. But if you use money, the Chit Chat Money promo code, it's down to $300. So you're basically getting

the subscription for half price if you sign up for the annual offer with that promo code. That does not expire after the first year. As long as you remain an active subscriber, you get to lock that a hundred dollars off a year benefit. All right. Well, as he mentioned, use that code money. Thanks for joining us, Simon. Thanks very much for having me.