Adobe (ADBE, Financial) stock is trending higher again after slumping through one of its worst sell-offs in decades. From all-time highs to 52-week lows, shares of the creative and enterprise productivity software developer fell 60%. Though Adobe has sailed higher since bottoming out back in September, the stock still seems way too cheap to ignore in my opinion, especially given the company's near-monopoly position and its recent investments in articial intelligence (AI).
Undoubtedly, it's been an underwhelming past year for Adobe. In 2022, the $172 billion company felt a bit of the heat from some small up-and-comers in the creative software scene. While Adobe is still a behemoth with a wide moat surrounding its software suite, companies like Figma and Canva may be seen as a credible threat to Adobe's near-monopoly.
Adobe is trying to acquire Figma, but the U.S. Department of Justice plans to reject the $20 billion deal over anti-competitive issues. Indeed, the Federal government usually hasn't put up much complaint to anti-competitive deals for the most part, but it seems this one was too big to ignore. Despite the regulator's disapproval, Adobe reportedly still plans to appeal the deal.
Can Adobe's Figma deal make it past regulatory hurdles?
Even as anti-monopoly sentiment grows, I do think Adobe can make a strong case to gain a green light from regulators. Last Friday, the Microsoft (MSFT, Financial) acquisition of video game company Activision Blizzard (ATVI, Financial) looked increasingly likely to go through as U.K. regulators dropped some of their prior concerns. That deal is much more anti-competitive than Adobe's Figma deal. With the odds of a Microsoft-Activision tie-up much higher than last week, with shares of Activision Blizzard up nearly 6% during the past week, I do think antitrust concerns across mega-cap tech companies aren't as high as some may perceive.
If a $2 trillion company can acquire one of the most dominant players in the American video game industry, I think Adobe has options as it looks to gobble up some of its smaller rivals in the user interface and graphic design scene. Compared to Microsoft, Adobe's a much smaller company. And after suffering such a catastrophic plunge last year, I don't think regulators should be giving the company too hard a time as it goes hunting for deals.
It seems unlikely that regulators will take a U-turn with Adobe and Figma. Regardless, I do think that Adobe has a lot it can do with its acquisitive power, especially after the tech scene's brutal spill. There are a lot of smaller companies that Adobe can scoop up without upsetting the DoJ.
Will Adobe be disrupted by AI?
For now, the market may be worried that Adobe could lose its competitive edge. It's called the shots in creative software for many decades, but with the rise of companies like Canva, many investors may be asking if Adobe is still worth paying a premium multiple for. It's not just the rise of smaller competitors that Adobe needs to watch out for. Generative AI threatens to disrupt numerous markets, including creativity software.
With DALL-E, OpenAI has its own AI-based digital image generator that leverages deep learning. All one needs to do is enter a prompt to generate an image that would have otherwise taken a Photoshop expert many hours to create. Indeed, Photoshop is a tricky software to master. With AI-based software like DALL-E, the barriers to entry into image generation have been lowered. Even if you can't choose exactly what you get, at least you can get something for free and in very little time.
While there will likely always be demand for Photoshop and other Adobe tools, one can't help but wonder how much new AI technologies will cut into the market share of today's incumbent players in the creativity software space. I think it could cut rather deep. That said, it could take many years before AI renders today's slate of creative tools obsolete.
Further, Adobe can alsu use AI to evolve its own business model. It's far better to cannibalize one's business than allow a rival to do it! Recently, Adobe launched its own generative AI, Firefly. Though the platform is in beta, one can't help but be awed by the ability to edit images via text. Firefly (and other generative AIs like it) could help Adobe maintain its economic moat.
Sure, future iterations of DALL-E and software like it may be able to do what Firefly can do. However, I do think few companies can do it better than Adobe. They not only have the expertise in creative tools, but they also have impressive AI talent as well.
Final thoughts on Adobe
I don't think investors are giving Adobe enough credit as it looks to answer back to its potential disruptors. With Firefly, Adobe is showing us it's very much aware that it needs to keep innovating to keep growth alive. At a price-earnings ratio of 36.9, I don't think the stock is expensive relative to the caliber of innovation you'll get from the company.
