Adobe is one of the largest software companies in the world. The company offers a line of products used by photographers, editors, designers, content creators, and students. Many of the products offered by Adobe work through a Software-as-a-Service (SaaS) model. The company organized its operations into 3 segments: (1) Digital Media (2) Digital Experience (3) Publishing & Advertising. The digital media segment’s flagship offering is the Adobe Creative Cloud subscription service. This service is most closely associated with the Adobe brand. The Creative Cloud includes Photoshop, Illustrator, Acrobat, and 20+ apps in the service. Although these services have been offered for a long period of time already, with a growing creator economy the runway still has a long way to go. The digital experience segment flagship, Adobe Experience Cloud & Adobe Analytics, is an enterprise service used to manage the customer and business experience. The experience cloud offers SaaS solutions to customers through web browsers. The last segment, publishing and advertising, is much smaller and really focuses on helping businesses in their advertising pursuits coupled with low-end desktop publishing products.

The Earning Power of Adobe

Greater than 90% of Adobe’s $15B revenue comes straight from its subscription services. These subscriptions are software based and result in incredible margins for the company. Adobe’s last fiscal year saw net earnings margin of 30%. At a time where inflation is running rampage, the lack of need to spend heavy amounts in operations will prove to be very kind to Adobe relative to other companies. One of Adobe’s key competitive advantages along with the economies of scale in being a software application provider, is its brand recognition. Anyone, creative or not, looking to edit a photo knows exactly which app to use – Photoshop. Customers in niche groups will already be well aware of which Adobe application is best for their use cases. Personally, I am no creative but I already associate Adobe with any sort of video and photo editing. There are other competitors in this field but they lack the customer captivity a brand like Adobe has spent years building. Just to show how strong Adobe’s earning power is, in the 2 year period from Nov. 29, 2019 to Dec. 3, 2021 total revenue grew 41%, this period was the 37-39th year of operations. Adobe is a fantastic company operating with exceptional economics that has been creating value for shareholders for many many years.

Adobe & Figma

Adobe has recently been in the news for its proposed $20B (cash & stock) acquisition of Figma, a collaborative web application. Adobe shares fell roughly 20% after news broke of the planned acquisition. It is clear investors are worried about the company paying such a large price for Figma. There are also concerns that regulators will step in to stop Adobe consolidating more businesses in a market it already confidently dominates. From what I’ve gathered Adobe would be acquiring a company known for its collaboration and design – beating out Adobe’s related products. This should help Adobe form a new image of themselves in this section of their business. What seems to scare investors the most is the price tag, which is 50x Figma’s current annual recurring revenue (ARR). The company has grown in leaps over the past decade and is still continuing to grow its ARR at a strikingly impressive rate. There is too little information out to decide whether the valuation Adobe is putting on Figma is far too expensive but I can see why some argue it is – as always time will tell.

Conclusion

Adobe is a great business and has been for many years. The company operates with monopoly-like economics and seems poised to do so for many years to come. The business has grown phenomenally as a result to its switch years ago into a subscription based service. The SaaS model it has implemented continues to provide high returns on equity and a very kind free cash flow yield. Adobe has proven to be a wonderful generator of shareholder wealth over the years and only time will tell if it can continue that form into the future.