The Canadian Investor - Has Adobe Become a Value Stock?

Episode Date: January 20, 2025

In this episode, we dive into the world of leveraged ETFs, exploring how they amplify exposure to assets through debt and derivatives. From the explosive growth in leveraged ETF inflows to the risks of daily rebalancing and long-term viability, we break down what investors need to know before jumping into these high-risk, high-reward products. Braden also takes a dive into Adobe, one of the most underappreciated giants in the tech world. Despite looming threats from generative AI and evolving competition from Figma and Canva, Adobe remains a very profitable business trading at cheaper valuation than other large tech stocks. The question with Adobe is simple. Is this growth sustainable for the long term? Tickers of Stocks/ETFs discussed: ADBE, HCAL, NVDL Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.  See omnystudio.com/listener for privacy information.

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This is the Canadian investor where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Bélanger. The Canadian Investor podcast. Welcome into the show. My name is Brayden Dennis. As always joined by the illustrious Simon Bélanger.

Good sir. This is episode 450. Hey. Yeah, we did it. Yeah. Episode 450. That. Yeah, we did it. Episode 450. That's pretty nuts. We'll have to do something big for episode 500. I know that later in the year, more news to come,

but we're gonna do another meetup finally. We didn't do one last year. We're gonna get the real estate team involved, our show, all the listeners. I think we'll have a really good group of folks. Sometimes, I think we're aiming for September, so more details to come. Yeah, yeah, yeah, but it's the kind of stuff that

it feels far away, but it'll come much faster than expected. Yeah, yeah, I definitely agreed. All right, for good old episode 450, you are gonna talk about leveraged ETFs, which is a hot topic. People always have kind of questions around this. I think you're gonna do a kind of good summary of it.

I wanted to go back to our roots for a milestone episode and talk about an individual company. I'm talking about the boring, the most boring tech stock in the market and, you know, opportunity or trap. Uh, so more about that. And then, uh, you're going to talk about where to find value in this market. So kind of related maybe topic to, uh, my second one. Yeah. Yeah.

They're going to be fun're gonna be fun to do. I was thinking about doing a deep dive too but because we're recording some extra episode Braden you're gonna be traveling for what like a week and a half two weeks something like that. Next week it is actually absurd okay. I go to New York for 24 hours and then I go to Barbados for work for 48 hours and then I get in my car and drive to Florida when I get home. I'll trade you for or I'll raise you with a moving to a new house with a toddler. So that is what I'm going through.

I'll take mine all day. I'm like, you know, I got zero world problems, like, you know, first world problems. Like, oh no, I gotta go to Florida. But like, yeah, it's, traveling for work can be really fun, but it's also very draining. It's like, I consider myself like outgoing. I like to talk to people and stuff,

but when you do back toto-back-to-back-to-back-to-back meetings, it is like, oh man, social battery is just zonked. Yeah. It depends on the personality, but I think it's nice, at least for me I find it nice when it's like that where you're constantly in meetings and traveling for work, it's nice sometimes just to have like, just a little bit of time, mental time for yourself, like it just, I don't know. For me, it helps me recharge. Yeah, that's a good point. You just gotta switch it up, just generally. I know for me, like I gotta switch up my work environment, like physically, often I gotta switch up the routine.

You know, things get stale man Totally agree, but I guess enough about that So why I guess the last thing I'll mention is I will be recording a few episodes early So Brayden and I will be recording another one this week Not quite sure when it'll be released but next few weeks We have to just make sure we figure out the dates and then Dan Foch and I did a to just make sure we figure out the dates. And then Dan Foch and I did a recap of last year in terms of real estate, and then what to expect going into 2025 and some REITs.

That could be some interesting plays, depending on what areas of real estate you're looking for. That one will also be released in the next few weeks because Britain traveling, me moving, it's gonna be a bit chaotic next few weeks, but we't want to miss a beat so that's why we're doing in advance. Hashtag show goes on. Show goes on and now leveraged ETFs. So leveraged ETFs increase the exposure that you have versus the asset. It's important to say the asset because I think you know as well as I do like there's an ETF now not

necessarily talking about like leverage ETF, but just ETF in general. There's pretty much any kind of ETF you can think of following any kind of assets available, right? Yeah, we're at the hyper productization of this asset class right now. It's part of the cycle. Yeah, exactly. And then leverage, obviously, it's using leverage to buy up a certain asset. It

can be done via derivatives, either with derivatives, debt or both or a combination of both. This can be for ETFs like the S&P 500, so those are pretty well known if you've been listening to a podcast or been investing for a while, you're familiar with those. But it can also be for single stock ETFs. One example is NVDL ETF, that is 2X long NVIDIA. So that one, I mean, it's gonna be pretty volatile. According, and according to a Reuters article

dated December 11th, the number of leverage ETFs has gone from 20 to 48 in 2024. They didn't specify, but I'm assuming this is for US stock exchange. Now, it's a lot. Leverage ETFs are inherently risky. And the reason I wanted to talk about this is because I think there's a lot of money going into those and there's some additional risk with that and the inflows have exploded for ledgerage ETFs according to that same article I mentioned and I'll add the link to the show notes for people who want to read it the inflows went from 83 million for the month of November 2023 to 2.38 billion in November of last year. So those are massive inflows. Now it's really important to be

very very very careful with these ETFs because a lot of them you'll see and typically it'll be in the name you'll see daily leveraged ETFs which it means it rebalances daily. So it's trying to mimic the move of whichever asset it is with leverage. Again, if the asset goes down, it will kind of make on the downside, but with that extra leverage to factor in and the other way around. So they're not meant to be held long-term, they are meant to be traded. And that's really important because if you, if you hold these ETFs for the long-term, even if your bet is correct and the company does well and you're along the company,

you'll probably end up losing money because that's not what they're meant for, they're meant for trading. Anything you wanna add before I continue? Yeah, like look into, we don't have to touch it on the podcast because we have many times in the past. Look into return decay or volatility decay of leverage products. Educate yourself on the math of decay.

If you're going to own these products and you'll realize why mathematically they are not meant to be held, rather to be traded. Yeah, exactly. And there are some other types of leveraged ETFs out there. HCal from Hamilton ETF is an example of this. It's a Canadian bank ETF, of this it's a Canadian bank ETF 1.25x leveraged ETF so they essentially borrow cash to create leverage and they do not use derivatives. I don't think it's a particularly great idea to use leverage on banks that are already levered up significantly. So if you think that's not an issue you clearly don't understand how banks work. Banks are highly, highly levered entities. There's regulation to make sure that they're not too levered because we saw with the

great financial crisis, I can't remember the leverage that some of the investment banks were using, but I think it was like probably 25 to 1 in that area. Like it was massive leverage and now it's less than that but it's still significantly levered. And my point here is just understanding also the underlying assets, even if they're not using derivatives to make it even more levered and just debt, which is the traditional way of doing leverage if you'd like. And if you want to understand a bit more how leverage can work for or against you. I think the easiest way for Canadians at least to understand is with a mortgage. As most people are familiar, you either have a mortgage yourself or your family members,

someone you know will have a mortgage, but you know- You're an aspiring- Or you're an aspiring, yeah. You're an aspiring mortgage, you're an aspiring holder of debt. No, exactly. And you can ask any homeowner who bought at the peak of the market in Canada in early 2022, and I guess excluding Calgary, but the other major markets, I think that's a pretty good blanket statement. And let's say they've seen, I think for most cases, the property values have declined 10% plus. Now, depending

on how much money they put in as the down payment, they could be sitting on no equity or even negative equity based on their original investment or their down payment. And in some cases if they were to sold CL right now, they would be completely wiped out and then some so they would not only you lose that Let's say and I'll give an examples here So if you're sitting on never negative equity and you sell you've lost all of your initial investment and then some so if you have You buy a home say for a million dollar you put 10% down So a hundred thousand dollars the home goes down 20% and it's now worth $800,000 you've actually lost all of your initial investment because your mortgage is still nine like let's say 890 whatever it is, but it's still more than 800 and

You've taken on additional losses because if you sell the home You'll have to repay the excess that you can't cover with the sale of the home to repay your mortgage. So that's the problem with leverage. It can go both ways. Of course you can magnify your gains if in the same situation you put 10% down on a million dollar home it goes up to 1.1 million forgetting all the fees involved and all that. You've been essentially doubled your investment because now your equity went up from a hundred to two hundred K million, forgetting all the fees involved and all that, you've essentially doubled your investment because now your equity went up from 100 to 200k. But it goes both ways and unfortunately in Canada we have the tendency to think that

it only goes one way and not the other. And now some people will definitely be feeling it as they are potentially forced to sell as a loss. And I wanted to use that example because I think it really explains the risk, not only of leverage ETFs, but leverage in general. If you invest without leverage, the worst you can do, you invest a thousand, you lose your thousand.

If you invest with leverage, you invest a thousand, you could lose more than a thousand. Yeah, it's, like you said, it's a magnifier, right? It is a magnifier to the ups, to the upside and to the downside. So it's not that leverage is a bad thing or a good thing, really, it's a tool. It's like all types of financing are a tool.

It's like when a company raises financing through share issuances or they raise financing through some credit facility, they issue corporate bonds. It is a method of fundraising. It is not necessarily good or bad. It is just method of fundraising. It is not necessarily good or bad. It is just simply a method. And that's the same with leverage, right? Like it's not good or bad.

It's just a magnifier. Yeah, yeah, I know. It's the same thing. The problem is when you have a market that's as bullish as it is right now, people tend to forget the downside risk of leverage. Exactly. They just look at the upside. It's these types of products are almost like Spider-Man.

Like with great power comes great responsibility with these types of things, right? It's you gotta be educated before you jump into the deep end and go swimming. You know, you jump into swimming into the deep end and it's just completely out of your element. So I mean, it's definitely, you gotta be educated on these things, man.

Yeah, to sum it up, buyer beware. That's it. That's the whole point of this segment. Yeah, I really think folks should look at return decay if they're looking at these and they'll understand the point of these products and why mathematically not necessarily great to hold on to these things. When it comes to ETFs, low cost, simple, diversified basket of ETFs is like the genesis of the

index fund, which is now in an exchange-rated fund for people to use, of course. All the listeners know this. It's like you had this great innovation. We don't need to go ruin it by making all these niche products and stuff. And when BMO came to sponsor the podcast, I was shocked at how they have some of the

best fees in the industry here from the Canadian bank. So glad to have them on as a partner. Yeah, no, definitely. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones,

all commission free so that you can choose the ETFs that you want. And they charge no annual RSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep

is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida

February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money

hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians.

And we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see. Because the lineup of ETFs has everything I was looking for. Low fees, an incredibly robust suite, and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world. Well, folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO all equity ETF. One single ETF, you get globally diversified equities.

So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. That was it. So I guess now I'm going to take a back seat and listen to your pitch for Adobe.

Adobe. I don't know if this is a pitch, per se. So I can come back in 15 minutes? This is, it's like talk myself through at therapy here for the, you know, walking myself through how I'd think about these things for the listeners on like a new idea. So, not advice, I don't own the stock. I don't have any immediate intentions of owning the stock. I may or may not own the stock in the future.

Do your own research, your own due diligence. Don't borrow conviction from me, Simone, or anyone when it comes to individual securities. I am just looking for value and I thought it would be fun for episode 450 here to go back to our roots, talk about an individual company. personally think Adobe right now is the most boring large-cap tech stock in the world. It's this stalwart behemoth at 180 billion in market cap, you know, this this Nasdaq company that feels like virtually no one's excited about except for maybe some of the existing shareholders

who've owned it for a really long time. Like, is this the least sexy tech stock in the market in terms of large caps? Yeah, yeah, I think so. I think it's also probably a reflection of AI. I mean, when I think about Adobe, the first thing that comes to mind is to me, it's a company that could be ripe for disruption with AI.

I know they are integrating a lot of tools and what they're offering, but again I think it would be easy to disrupt 5-10 years down the line. I don't think it would be happening anytime soon, but I could see it happening 5-10 years down the line for sure. I could see them being resilient and just leveraging AI to make their tools even better. And there's nothing that comes close either. I think that that is right now where the, where the, the market is pricing this is that kind of

loom of existential threat from new technology, from text to image creation, text to video creation, type of technology coming out with generative AI. I'm going to talk a lot about that here when it comes to Adobe. But first, let's start with the basics. It got me interested because it just seems like the most boring tech stock.

The fundamentals still seem quite fantastic, frankly. And name something like this of its stature that is flat over the last five years. Like you have the Finch ad performance chart over. That stock has done nothing since its mega run up and it got overvalued. Yeah, it's been like for those listening, I mean, essentially last five years, not quite, but I think it's fair to say it's almost been trading sideways, like ups and downs. But if you're looking at the starting point compared to last five years,

it's definitely massively underperformed the index. I don't have the index here, but I know it's underperformed it. Yeah, yeah. It's a 3% cagger since, what is that? I guess January of 2020. Okay. Yeah. So look at it. Is there a less exciting piece of software

than Adobe Acrobat? Like is that like the most boring piece of software you could possibly think of? It's a great tool though. Like I use it at work. It does exactly what people need to do. Exactly, yeah. It just does exactly what it needs to do,

nothing more, nothing less. And I think that that's just kind of the out of favor type of technology right now, honestly. And there's this looming AI threat that's clouding the business right now where people fear that, you know, why would you need creative tools? I mean, they do the document, the experience cloud,

those are the two other segments, but the flagship product is the creative cloud, which is, you know is Photoshop, Premiere Pro, Illustrator, Express, Lightroom, Stock Images, and stuff like that. So the Creative Cloud has really been the flagship of the business. It's like, do you need those tools if AI will create it for you with some prompts?

Coca-Cola has been airing these completely AI generated animated Christmas commercials. Now, they look AI generated and they don't look as good as professional animators. Not even close, but I mean, think of how much less it would have cost to build that out, right? I haven't seen any, so I'll just have to take your word for it. It looks like it was made with the generation technology

like eight months ago, not last week, because that's how quick these things are changing, right? Like it just, these things just look more and more photo realistic, video realistic, every month at this point. Like the pace of innovation is incredible. And I think that that's why the overhang of AI threat sits on them so much.

It's like, okay, well, it's not a replacement right now, but I see the treadmill that we're on right now. Yeah. So they're leaning into AI a lot with the existing product suite, no doubt. I think Adobe Firefly has been well received. It seems to be quite good, right? They have that advantage.

They own the stock image training dataset. They own the Photoshop dataset, and they own all the tools for people to kind of create on top of it. Adobe right now trades at 16 times next year's EBIT or operating earnings. And so that has had a high of 43 over the last five years and a low of 15 in kind of the lows of 2022. So it is basically at its, you know, historically low forward valuation in, you know, in recent years. There's three parts of the business, the creative cloud, which is again, Photoshop, Premiere Pro, Illustrator, Express, Lightroom, Firefly, Stock Image. That's the creative cloud subscription.

And then there's the document business, which is Adobe Acrobat, eSignatures, different tools around PDF and Word merging together. There's different, you know, big, big boring company subscriptions, right? Like that's what these things are, but they do the trick. And then there's Experience Cloud, which I definitely know the least about,

but it's optimization of checkout flows, B2B marketing tools, suites like that. I don't know this business that well, but it is a multi-billion ARR business at this point now. So something is obviously there. This is the one segment that I would wanna learn a lot more about if I was to become a shareholder. I am not nearly in a position enough to understand

this segment of the business to be a shareholder of Adobe. Those three segments, so Creative Cloud, Document Cloud, and Digital Media, they call it, have grown wonderfully over the last 10 years, compounded at 45%, 30%, and 48%, respectively, on ARR, on annual recurring revenue. And props to their financial reporting, consistent across all revenue segments and KPIs they report.

They don't change them, they don't restructure things, they keep it simple and it's quite beautiful. Their tables are super nice to look at. So in recent years, we're talking about not as impressive growth, but in recent years, we're talking about still double digit growth across all of them. The document clouds really picked up

as they take market share back from a DocuSign type business. Okay, any questions about the products so far? The growth trajectory that we got? No, no, I keep going, yeah. Okay, cool. I'm just looking at their data here. Man, I appreciate companies that don't change their segments so much

because we aggregate them with VintChat and the companies that are bad actors here, usually they're trying to hide something. Adobe's is super nice. All right, buybacks. They have been ramping up the buyback machine. As that multiple has declined and declined to climb, they have ramped up the buybacks.

They just did record buybacks in Q3. I'm excited to see what their Q4 number looks like. But nine billion repurchased in Q3 alone. Seven billion in the quarter before, six billion in the four, five. So significant amount, oh, those are LTM, sorry. So nine billion has been done in the last 12 months. So not per quarter, nine billion repurchase in the last 12 months.

But you see that it is steadily, if you slide down there, it is steadily increasing how much stock they are buying back as the stock gets cheaper in their mind. It's quite profitable. They're generating several billion in free cash per quarter. They have a net cash balance sheet fortress, seven billion in cash, roughly five billion in debt, most of that being long-term debt.

It's hovered in the low 20% return on invested capital. Fundamentally Simone, Adobe right now, lock in time. That's not how investing works, but you lock it in time, put it in a box. Adobe is a fantastic business, no question. Industry leading margins, everything, the great promise of software. You get it in Adobe, right? It's absolutely beautiful.

But that is the problem. We don't invest for just now. We invest looking forward, right? Correct. I'm just trying to set a baseline of, I think we can agree fundamentally, Adobe is a fantastic business. Shantanu Narayan, the CEO since 2007, I think folks have basically been calling

for them to switch it up. I think with having a large cap tech stock flat for five years while the rest of the market has boom years on the NASDAQ. I think that that's the main reason for the call of switching at the helm. I think the underperformance is really quite that SaaS valuations and Adobe for sure were in the early 2020s outrageous and completely silly. Having to deal with the hangover of that is really difficult for the stock to do well. I think moving on from Shantana would be a mistake.

I mean, under the leadership, they transitioned the business into a subscription-based juggernaut that it is today. And many consumers hate the subscription model, understandably, but let's be honest, this is the best model for software. And it's certainly a good business. Paying once for software, by the way, is a terrible social contract. Not getting constant upgrades or service on the business or on the product is not good for both sides. The software you actually wanna use and subscribe to as BS customer of long-term

is not going to abandon the support innovation as a customer, right? Especially if you're gonna be trained on it professionally using it for a career. So that's just my opinion, right? Because these are, this is career software. Photoshop, Illustrator, Premiere Pro, this is career software.

It's like, I took Autodesk, right? They're creating career software. Of course, hobbyists are using it as well, but this is career software. So you don't wanna be hung out to dry. Although I have to say that it was nice when I was in university to just use the copy of Microsoft Office, like 2000,

that my parents had for like 12 years straight. Love that. Because at that point it was not that much different right like you had like incremental upgrades but for the most part you're doing university research papers and stuff like that you don't like just need something to write it on and classic formatting like it doesn't need to be fancy or anything like that. So from a consumer standpoint, that was great, but I agree with you nowadays,

ours oftentimes like so many new features added. So the subscription definitely has some value. And what I'm showing here for Joint TCI is just a free cash flow per share. So you talked about them buying back a lot of shares. I don't have the free cash flow numbers, but just based on that and the amount of shares they've been buying back, I would say free cash flow is probably down a little bit, but they're more than compensating for it by buying back shares.

Stig Brodersen I had a chart pulled up before to just the nominal free cash flow and yeah, it grew really, really well through 2022. And basically, through 2022 and basically growth has really stalled off in the past 12 months. So that's another thing looming over the business. It's like, okay, look, people think that it's going to stop growing at this pace because of the threat of competitors and disruption. And you actually did see a deceleration and in fact, actually a net decrease on a lot of metrics year over year from 22 to 23. So that is valid.

That is legit. As do it yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by money sense and with them you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RSP or TFSA account fees. They have an award-winning customer service team with real people

that are ready to help if you have questions along the fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money.

Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just gonna be sitting empty,

it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on

enjoying your time away. Find a co-host at airb.ca forward slash host. That is airbnb.ca forward slash host. So not so long ago, self-directed investors caught wind of the power of low cost index investing. Once just a secret for the personal finance gurus is now common knowledge for Canadians and we are better for it. When BMO ETFs reached out to work with the podcast, I honestly was not prepared for what I was about to see because the lineup of

ETFs has everything I was looking for. Low fees, an incredibly robust suite and truly something for every investor. And here we are with this iconic Canadian brand in the asset management world. Well, folks online are regularly discussing and buying ETF tickers from asset managers in the US. Let's just look at ZEQT, for example, the BMO all equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective.

Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank, is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Okay, so let's talk about some of those threats, particularly in non-Gen.ai first. Those two big players in my opinion are Figma and Canva. Yeah, so Figma was the one they tried to buy, right?

Okay, yeah, sorry. It's been a while we talked about that. September of 2022, Adobe had a acquisition pending of Figma for $20 billion. It was a very expensive price to pay based on the size of Figma, but you could tell that Figma was making them very nervous on some of their key creative cloud products, especially around graphic design, website design,

these kinds of things. So what about Figma? Figma is used by every designer today, every graphic designer. It is kind of the gold standard now at this point for graphic design. If you are going to work with a designer to have your website designed,

they're going to do it on Figma and send you the file. It's super easy because it's all cloud native. So it makes it super easy for people to collaborate. Multiple people can be looking at the same thing at the same time. It's like this beautiful blank canvas. And seeing someone who's really good at Figma in action, like my CTO and co-founder's wife,

she's a graphic designer and like a Figma wizard. It's like when you watch someone who's really good at Excel and they just, they don't even use the mouse, right? She wants to do the Canadian investor website, Revampit. Oh man, we need some help. Yeah. Hey, our website's not that bad. No, no, it's good.

But I think it's a good project for this year for sure. Oh yeah. It's, I made it. That's all you need to know is that I made that one. I mean, it's better than what I would have made. That was not my point. My point was that, yeah, like, revamp would be good. You cannot hurt my feelings.

I am not a good designer. I am quite, I know what I like. I just don't know how to execute it. Like, you know what I mean? That's my issue too, is I get into these tools and I'm like, where do I start? Like, it's just, yeah, I find the tool when you're not used to it, right?

It's just kind of a little bit like a lot of stuff and you're like, okay, how the hell, even with a tutorial, you're like, I don't know where to go. Yeah, exactly. And these are things that take a while to get good with and it's what makes them sticky, right? It's like high upfront work effort

and then once you use them, it's very sticky. So that's Figma, that deal, they called off in 2023. So a little over a year ago now, they announced from both sides that they would be abandoning the acquisition. Too much pressure from regulators, it wasn't gonna happen, right? It was, especially that was a real era of no antitrust, sorry, no, no deals getting done that strike that antitrust cord. Right? So.

Yeah. Well, with, and in all fairness, if you look at what the US was doing under the Biden administration, I know it's still technically the Biden administration, but they don't have much leverage at this point. Technically. Yeah, technically. But you look at some of the antitrust stuff that they did last year with the FTC, so the Federal Trade Commission under Lina Khan. Lina Khan. You know, some, I mean, I think there were definitely some valid concerns in terms of the information that was shown.

But I think just to see how aggressive they've been on certain files, I would say that it was probably a smart move to not go ahead with it because then if the writing's on the wall, right, you just incur so much cost related to that and then you end up just throwing that into the abyss. Be swift and decisive. Exactly. That's it. Yeah. You wonder if something like this comes back,

back on the table. I could see, I mean, you know, Trump has his, I mean, my impression is that Trump has a lot of, you know, there's companies he's not a fan of. I think we, anyone that's listened to him can probably figure that out. Their administration as well, I think they have some gripes with some of the big tech, maybe not so much some other ones. I don't have a feeling that they'd be too concerned about

this. That's just my impression. I could be completely offside here, but I don't see them really being that concerned about an Adobe buying a Figma. I just don't see it, yeah. Yeah, you could see this plated back on the table. I mean, and you can make the case, right? Like say, hey, this market has expanded. It's no longer like this would be a combined 95% market share. This market is now expanded with all these new players,

whether it's Mid-Journey, OpenAI, Anthropic, whatever. It's completely different. It's totally different. As weird as it sounds to say, within a year and a half, two years, the landscape has completely changed where you only had a few companies potentially competing against each other with these kind of tools

where now the sky is potentially the limit like what's to come right yep agreed so that's figma Canva is another one not as different different types of the market in terms of Adobe and figma are a little bit more up market. Canvas for idiots like me, it's super easy to use. You don't have to be a professional designer and you can get kind of really nice looking out of the box assets, the digital assets and designs created quickly, easy.

I've used it for presentations, I use it for making quick marketing material, visuals and stuff like that. You can even do some basic video editing on there. But it's not, it doesn't have the bells and whistles of a Figma and Adobe products. And that's by design. It's for people like me to be able to use it. So those are the two kind of two big other players in their Creative Cloud. Now we've been talking a little bit about generative AI. The threat here on Creative Cloud. Complete text to image versus a bet on Adobe

is that it's complimentary in the workflow. I think that's the discrepancy is complete text image or text to video or text to complete website or text to complete project in the realm of possibility or is it still going to be this complimentary to the workflow? I think you have to have a view on that to own this stock. I think. I think that's why it's traded sideways for so long now. It's because so many people are like,

how am I supposed to know? Like, I don't even know what I'm gonna eat for dinner tonight, let alone tell you what generative AI is gonna look like in five years. I think that's completely fair thing to not know. And I don't know. I sure as hell don't know. I don't know either. I mean, it's been really interesting just to watch the progression of AI, how quickly it's come. But I think some things I thought it would be better sooner. I think there are also some of that, you know, you talked about video images. I think it's

starting to be really good, but I think there's still some limitation. I thought it might be a bit better sooner, but at the end of the day, it's just this extra uncertainty regarding the company. As soon as you have uncertainty, then the market is having trouble projecting, and that's where you can find some better valuations and maybe maybe Adobe is in big trouble in the next five ten years and the valuation right now is completely you know we'll look five years from now or ten years and say wow we thought it was cheap back in January of 2025 it was actually super expensive based on what happened since then. Or we could look back and say, oh, things were just overblown and Adobe ended up really

navigating that well, leveraging AI. They have an even better stranglehold on that market now. So I feel like it's almost two outcomes. There is not that much in between. And I think that is exactly why my conclusion here on this right as of right now today, I think the valuation is certainly fair and starting to get attractive.

But as you mentioned, that kind of binary outcome, I don't think it's cheap enough yet to really want to take a swing at what feels like a binary outcome. And I thought about this a lot because I am personally building in AI as a founder who is bridging the gap between traditional user interfaces and generative AI interfaces. Both of those are core features to FinChat of course. And you basically need both of them together and you need the point-and-click traditional interface super powered with AI on top. And I don't think that we're going to want to be in a position where AI does your investing for you start to finish. Right?

So that's the comp that I'm thinking of. And this is the only reason I don't have a hard opinion on this is because text to generative creative assets is not a world I'm an expert in, but I'm just thinking about it from the complexities of how intense these products are behind the scenes when it comes to Photoshop and Premiere Pro, is there enough to completely abandon them? For investing, I don't think so,

that's why I'm building this product and going so hard into it. On the creative side, TBD. Yeah, and I mean, I get it for investing because as much as I like the AI version of FinChat and I use it pretty regularly, I have to say that there is something for me to kind of type in a ticker, look at the company,

see the data with my own eyes. And I don't know if it's how my brain works but I can see patterns pretty quickly by just looking at that data myself and sometimes it's just I'm not sure what kind of prompts I'd be asking it and then when I see the data I kind of have ideas just by viewing the data. It's weird but that's how my brain works. I feel like a lot of people in investing that's also how their brain works as well. But again I will also use it for if I'm wanting to look at a conference call that happened and trying to get the key points that

were discussed during that conference call. It will do a great job at summarizing that and then pinpoint me to where to look exactly in the conference call or some of the material. So it's something that, yeah, I do like the hybrid version because it gives me almost the best of both worlds for at least the way I operate. It's something that can get you from zero to idea generation to conviction, to investment, full cycle. And I think that maybe that's the takeaway here is

with these tools that could be why Adobe is cheap is because of that exact same thing. Here's a piece of data, here's a anecdotal piece of data for you from running FinChat, okay? When we remember how that was Stratosphere and the chat interface were two different products? Call it a year and a half ago, roughly. When we launched FinChat, it was 10% to 14% monthly churn,

meaning 10 to, call it 15% of the paid user base was churning off their paid subscription. Okay. That you cannot build a business with those numbers. Well, you have not a great one. Yeah. I mean, on an annual basis, you churn through like 150% of the user base,

meaning you have to grow unbelievably fast to be able to, you hit a ceiling, you can't actually build a successful software business. The churn is way too high, way too many cancellations. And it was because people are like, this is cool. This is great. This is awesome. I'm able to do these amazing AI capabilities now,

but I can't change my workflow. I still have to use these traditional tools. So when we merged it with the traditional tool, a case, it's the stratosphere data set. And we built that one slick terminal interface. Churn overnight, next month, went to sub three, which is very good. Very, very good.

Now, like that's top 10% of that price point products. So from crippling churn to not like industry-leading but good levels overnight. So maybe that's a little piece of anecdotal evidence in the story here. I'm not sure. No, I mean I think it's a great way to think and it's a good mindset or a good thought process for people to think about because this is not the only business where there's gonna be question marks with AI. It's going to happen.

I think it's going to happen even more so in knowledge businesses. I think we're far, far away from having robots doing like manual, like well drilling and stuff like that. I'm not saying it's never gonna happen but I don't think it's happening anytime soon. So I think for a lot of knowledge businesses, so obviously software but other types of businesses, I think it should be on everyone's radar. And there are a lot of

these businesses. Obviously we think about big tech and these are software but they've invested in the infrastructure for a lot of AI, but there's a lot of software businesses out there. If you're investing in them or you're a shareholder, I think these are, if you haven't asked yourself these questions already, you should start asking yourself some questions. And it's not an all or nothing, I don't think it is for a lot of businesses, but it's understanding does the current price or the current valuation of that business, is it incorporating the potential risk

that this business may be facing? In some cases, it could be existential. You know, going through this process at 300 bucks, I think the stock stocks are slam dunk. It's like $410 today. That would be a pretty cheap forward multiple. 25% discount from here, I guess, right? Roughly, yeah.

If my mental math is good. Yeah, that's right. No, that's exactly right. So I think at that point, you're looking at some pretty compelling upside. Yeah, and that's what I'll talk. So you mentioned about where to find value in this market. I think this segment would be too long.

We'd go on for too long. So we'll keep that for our next episode, but that is something that I'll discuss is there are certain areas where, for example, investing in other stock markets outside of North America there could be some really great businesses outside of North America that you know you would pay a premium for that same business here but because it's located elsewhere for whatever reason where

there its currency risk country risk geopolit risk, whatever it is, you're getting it at a much cheaper valuation. But then the calculus that you have to make is does that cheaper valuation, does it give you enough of margin of safety for the risk you're encountering? And that's a little bit what you're talking about here with Adobe is that if it takes a 25% haircut from here, in your view, then the margin of safety that you're getting justifies the potential AI risk for the business. And I think another important point here is,

I know when I was a less experienced investor, I wanted to be perfect on entry point. I wanted to be perfect on valuation. I wanted to be like, I was trying to make everything like OCD almost. And I realized over time that one, it was completely unrealistic.

And that two, it was completely unrealistic, and that two, it was, it was, I was letting, you know, good get in the way, or like great get in the way of good, however the term goes. And so, the point here, I think with valuation, especially when you're buying good high quality companies that you're gonna hold for a really long time. That's an important piece,

because if you just wanna hold something short term, you gotta be right, you gotta be more precise on being right, and that's a game that I don't wanna play. But if it's a game that I do wanna play, which is buy something great and hold it, buy right, sit tight for a really long time, I just have to be directionally correct. Yeah.

You just have to be directionally correct and you just have to be not in that overpay bucket. And so I think not letting great get in the way of good is a pretty good way to think about valuation if you're gonna hold something for a really long time. And it took me a long time to recognize that or really understand my psychology around getting valuation precise and perfect and OCD. Yeah, no, that's a great point. And I guess I'll finish with a little bit of a curve ball here because I was looking at what day we are today so January 14.

When people hear this it'll be January 20th. You know what's happening January 20th? The orange man gets inaugurated. Oh right is that the 20th? Has this much time already passed? Yeah yeah so it's gonna be people will listen to that so my question for you is I know where this is just for fun so do you think he'll impose tariffs on Canada and Mexico and If so, what do you think? how do you think the market will react in Canada because I I'll let you think about it a little bit because I was kind of thinking about it beforehand. I

So far, I mean that looks like he has not given any indication that he won't go ahead with it. So I still think he might end up putting tariffs, but maybe 10%, 15%. I think that's a possibility. What I think is there may be a knee-jerk reaction from the markets and it could create an opportunity for certain types of companies in Canada. One that I still have in mind that I'm keeping a close eye because I love the business is Canadian Pacific. I feel like that one if there's bad news about tariffs, I think there could be knee-jerk reaction happening with that one because it has with the Kansas City Southern, it goes

from Canada coast to coast all the way through the Midwest, all the way then to Mexico. Clearly, it could have a short-term impact to their business, but I think the market could potentially overreact there. I haven't thought too much, probably as much as I need to think about it. It's just portfolio companies not particularly affected right now.

So just looking at my own book from this perspective. But the one thing that I've learned about Trump in the last, especially in this cycle of him become president again, is one, people in the media don't take what he says seriously because he says seriously because he says a lot of stuff, right? Yeah. So I'll impose tariffs.

Oh, we're gonna buy Greenland. We're gonna buy the Panama Canal. And people always just think that he's just like trolling because he is such a troll. And he just wants to make everything funny. And honestly, you can't not think the guy is funny, honestly, at this point. But it's almost, I've realized, a genius tactic

because you get the media to soft socialize your ideas. They soft socialize your ideas without people panicking because Trump's just being Trump. He just says shit all the time. You know what I mean? Then what happens is you get like this soft socializing of, oh, we're going to buy Greenland. Oh, we're going to buy Greenland. Oh, we're going to buy Greenland. You've heard it 37 times When he goes in office, he's like no, I'm serious people are like, okay You know like are you oh, yes He is serious about this and what it does is it brings a bunch of people to the negotiating table? And he gets the world and the media to soft socialize

These what appear to be radical ideas that might be good for his story, the people do the work for him. So I've actually realized that his tactics are much more calculated than anyone gives him credit for that's, you know, centrist or left leaning. That is my take on Donald Trump, this go around. And I think that he is very serious about those propositions and also very serious about saying, hey Canada, get your freaking act together.

And guess what? I agree with him on that. So I'm obviously not rooting for things that are gonna hurt my country. I hope they don't happen in a negative way. But I think that this election cycle for Canada and all this spotlight happening from the US is giving us a wake up call and a shake

that frankly is long overdue. Yeah, and I mean, I have a little different view, but I guess it's a bit similar than you is I think he puts, you know, the most not outrageous, but the most extreme outcomes as is asked. And then when you know, he goes and negotiates and then people feel like they've won. If it's not that extreme outcome, it's something more reasonable in their view. For example, like I know you talked about Greenland. It could be that maybe the U S ends up having a kind of security treaty with Greenland that incorporates, that allows the U S to have, you know, tons of

military installation. Naval bases. Naval bases and potentially benefit from like resource extraction or some kind of bilateral agreement in terms of trade that could benefit the US but also Greenland. So that's where I think that's what he does. So when there's a deal that is negotiated, that's like, oh, okay, it wasn't that bad in the end. He just kind of set the thing so far off to the extreme that people kind of feel good,

even though it ends up being a deal that's pretty favorable to the US. Exactly, it's the whole negotiation never split the difference idea. I'm gonna start here and I'm willing to go here, but if I started here, we end up down there, right? And so that's what he does. And I think that he's so good at getting the media

to tell his story around the world so that when he does show up to that negotiating table, there's no one that's unfamiliar with his stance. No, I'm sorry. You already know where his stance is in terms of like the most extreme example, right? And he's gotten away with everyone going, ah, it's just him saying that shit

with the most extreme example. It's just Trump being Trump, let it slide, you know? So it also doesn't incite the same rage that it might. So I don't know, man. I think he is a case study on the most extreme examples on a variety of things and seeing it this time around, I'm picking up on things that I used to brush off as him being a buffoon.

Yeah, no, same for me. I think I view it a bit of a, definitely a different lens now. And I think, you know, him being reelected, maybe I'll just finish on that. It's probably a warning to Canadian politicians of all stripes, you know, using aggregate data, whether it's GDP, whether it's, you know, inflation coming down. When people are telling you that

they're hurting, you should probably listen to them. And that's what we saw in the US. Aggregated data looked very good, but a lot of people were hurting and they voted for change. Obviously it was in the office before that but they voted for change because it was a different than the current administration. And so I think politicians should really take note of that and listen to what people say. Like forget about all the headline stats or and stuff like that. At the end of the day, if you're having trouble making ends meet, if Canada's GDP grew 2%, you do not give two Fs about it. You're having trouble making your monthly payments.

That's what you care about. No matter how good the economy is, you're struggling and you'll likely vote in that direction as well. You'll vote for something different. And then in Canada, it's worse because we don't even also have that macro picture to tell a positive story in the first place. I've seen it spin a little bit, but I think you know my views on that.

I won't go on the tangent in terms of, you know, lowering interest rate is a sign that Canada is doing well. I'll just... Did you listen to Poliev on Jordan Peterson? No, I haven't. A couple of you listen to Paul Yev on Jordan Peterson? No, I haven't. A couple of people have told me that was really interesting. So, um, I'll listen to that. I mean, I tried to educate myself, like no matter who's running and obviously

he's going to be running the next election. Who knows for the liberals. I think Carney was on with John Stewart. I saw that on YouTube. So I'll, I'll listen to that. I'll listen to Paul Yev'll listen to Poyliev. Like I like to listen to everything and make my own mind. That's kind of how I view things and then, you know,

just get the data and then that way I make it an educated decision. It is nice that the, I'd like to get both of them on whoever it is gonna be for the libos. I'd like to get them both on on, whoever it is gonna be for the libos, I'd like to get them both on the podcast here on the show this year. I- The mystery person and then-

Yeah, exactly. I've been reaching out to some contacts. If anyone on the pod has a connection, I'd love to get them on. I think, you know, our audience sizes and content type is certainly warranted of a visit to our podcast and the real estate shows as well. And I just want, I'm excited that long form content

has mainstream hit politics now. People are calling the US election the podcast election, going on all the podcasts, getting people to hear your story, humanize them a little bit, right? Whether it's going on Rogan or Theo Vaughn or whatever it was, humanize them a little bit, playing 18 holes of golf with Bryson DeChambeau,

that video was very high performing. I'm excited for that to translate to the Canadian election because long form content is where these big topics need to be discussed. No more 30 second smear campaign on the Leafs game to make a decision. That's garbage. That's how all previous elections have been won or lost.

Complete garbage, not useful, not constructive. I'm glad we're moving to a new long form decision making process. Yeah, and even the debates, right? Oftentimes the debates ends up being like a bit of a shouting match and you don't get a lot of substance and they're interrupting each other. It's too interruptive.

It's too interrupted. Emotions are too high. I'll still watch it. I think it's important to watch a debate. Don't get me wrong, but I think uninterrupted, giving the same equal chance to all the parties, I think that's really important so they can really answer those tough questions and say what their policy is going to be. I think that's a really reasonable approach.

And yeah, like it could be Poirier, the next leader of the liberal hell, Jagmeet Singh to the NDP. Like I think it's important to, you know, have a long human discussion, you know, not afraid to ask the hard questions for all of them and then let them the chance to actually answer, not being cut off. I think that's a good thing in my view versus you know the debates, the shouting match and then as a French-Canadian too

it's always tricky because then you get like questions in French or not all of them are as good in French so sometimes then you'll get the block you know really doing well because they mastered the language and then it's the other way around. So it's always tricky, but that long form. If you ask the questions in French, that would be a really legit. That would be like, we would be so far above.

Because you actually have that ability. I'll need like a live AI translator during that. I'm sure we can find that for you. Yeah. All right, thanks for listening folks. Really appreciate you tuning in. We are here Mondays and Thursdays on the pod. So you just did a solo episode that's coming out

Yeah, well we're recording before it's coming out, but you'll hear that after it came out It already came out Yeah, yeah was Dan so Dan really had a rough time with his voice. It was last minute He just didn't think he would be able to record so because it was last minute. I'm like, you know what? That's okay I'll do a solo episode. And I just recorded it this morning, listened to it afterwards, because I was a little bit nervous. First time I do a longer solo episode, I did once about some financial struggles

I had in my earlier 20s. I think it turned out pretty well. So people, I encourage people to let me know what they think. Nice. So the show goes on, really appreciate you tuning in. And let's have a good year, man. Episode 450, in the books.

451, 452, all the way the show goes on. We're excited to keep bringing you guys good content. Thank you for supporting us through all of these years. It does not go unnoticed. You can support the show a little bit by going onto your podcast player and making sure you're subscribed and leave a rating. Easy to do, few seconds does wonders for us

and new people to find the show. So we appreciate you, take care. The Canadian Investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.