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500lb Gorilla, On Sale At A Broker Near You
It is not very often that you get to buy a rock-solid software industry stalwart at a truly collapsed stock price. But that is what ADBE 0.00%↑ offers right now. Hammered by what the market perceives to be a risky and/or frivolous $20bn acquisition, ADBE can be bought today for a pre-Covid price (unlike way riskier names like Cloudflare). We believe this to be an opportune moment to begin accumulating ADBE as a long-term investment. We lay out our logic and levels below.
But before we do that, let's say upfront that this thesis could be nuts. The market could be going to zero. It could be that software is going to zero because nobody can afford the electricity required to run datacenters anymore. Perhaps we will all go back to printed media fashioned with hot metal type and nobody will need design software anymore. Whole buncha reasons why this could be a bad idea. But we don’t think it’s a bad idea. We think it’s a good idea, and we think that just in case it does prove unwise, a proximate stop-loss can save us all from undue pain.
Adobe, you see, has constantly re-invented itself since the early 1990s and that is highly unusual in the software business. The company has made the change from desktop (hard copy) publishing to digital publishing, from upfront payment to subscriptions, from static digital content to interactive, immersive content, and now with the Figma acquisition the company is committing hard to collaborative tools. In achieving this constant transformation, the company has avoided obsolescence (unlike sometime competitor Quark), consolidation (unlike say Macromedia), or ossification (unlike say Oracle). Only Microsoft has achieved anything comparable at this scale. Now, if you want to keep doing this at Adobe’s scale, you can’t do it by internally coming up with new product ideas. Large bureaucratic companies don’t work that way; career success in such places is measured by adherence to the company line plus just enough vim and vigor to push a few things forward by just the right amount. Creative destruction of the kind required to invent completely new products with which to open new addressable markets or deflate and destroy old markets? That’s startup DNA. And when it works, it is very expensive for old-line companies to acquire. And even more than the cash cost is the shock to corporate DNA of having to now embrace and adopt the inevitable team of enfants terribles who now join the old-soldier ranks. But this is what companies like ADBE must do if they are to keep succeeding as an independent business. So we look at the Figma deal and we say, well, we have no clue whether it will work out or not and even less clue whether $20bn was a wonderful or an insane price. (You will recall that when Meta Platforms acquired Instagram for $1bn it was deemed insane. As was Google’s acquisition of YouTube for a few hundred measly million bucks. When these hot new products open up new markets? Big acquisition prices quickly become good value). But we do applaud the ADBE team for having the chutzpah to make such an acquisition, and we think there is every chance it can work out.
And as a result we think that buying ADBE right when the market is telling the company it has made an expensive mistake? We think that can work out.
Below for our paying members we lay out our price targets, logic, and ideas on placement of stop-losses in case in fact this idea is nuts.
(If you’ve yet to become a paying member here, fear not. We now offer a 7-day free trial, which upon signing up for gets you access to all the good paid content. You can sign up for that trial at the link below).
Here's the idea.