I will write up a full analysis on my Adobe position at some point in the future. this is just to test my new Content management system!
I recently completed my DCF for Adobe. I looked at a few different scenarios, and this is my thesis:
AI is a headwind to pricing power but a tailwind to TAM
AI Agents will materially affect growth, but the market is overblowing their negative effect. Where we see reduced seat count, we may also see a larger TAM. I think the safe assumption is to recognize that Adobe's double digit growth rates are over, and to taper them down to mid single.
Generative models are good at creating, but they aren't great at creating exactly what you want. This is where adobe can capitalize if they are effective at implementing Firefly.
Adobe may take a larger hit on margins to ensure they keep users inside the platform, but building past pure seat count is likely.
Adobe Firefly becomes the default "safe for commercial use" model as it is trained on licensed, owned, or public domain content. No legal ambiguity. Firefly is built for editing, and not just generating which is a main issue (in my opinion) with other models.
generate → refine → mask → composite → animate → export → publish
all inside Photoshop, Illustrator, Premiere, etc.
In this scenario, OCF margin compresses from 42% to 38% leading to a 12.8% IRR at todays price of $243.
Todays intrinsic value: $358.
Intrinsic value at FY2030: $444
(updated image with 7 year DCF below)
My models use static a discount rate of 10% and Terminal growth rate of 2%.
Thoughts?