CREATIVE ACCOUNTING IN AI

(ADBE), (IBM), (MSFT)

Last weekend, while helping my daughter with her college design project, I watched her struggle for two hours with some free photo editing software that kept crashing. When I suggested she try Adobe (ADBE), she rolled her eyes. “Dad, that costs actual money.”

Fair enough. But 30 minutes after she finally broke down and signed up for Creative Cloud, she’d finished her entire project and was already working ahead on next week’s assignment. “Why would anyone use anything else?” she asked, genuinely puzzled by her earlier resistance.

Which got me thinking about Adobe’s stock, now trading around $354 after getting hammered 15% since earnings. 

Here’s a company that just reported $5.8 billion in quarterly revenue with 10.6% growth and gross margins of 89.1%. 

Back when I started investing, we called companies like this “cash cows.” Today’s market calls them “yesterday’s news” because Wall Street wants every tech company to deliver miracle AI profits by next Tuesday.

The truth is simpler than the pundits make it out to be. 

Adobe owns the creative professional market the same way IBM (IBM) owned mainframes in the 1970s or Microsoft (MSFT) owned office software in the 1990s. When you absolutely, positively need professional results overnight, you use Adobe. Everything else is just weekend hobby software.

My daughter’s experience reminded me why Adobe maintains its pricing power after all these years. When push comes to shove and deadlines loom, professionals pay up for tools that work. That’s been true since the days of desktop publishing, and it’s still true in the age of artificial intelligence.

The company’s buying back stock at 163% of free cash flow while actually reducing research costs as a percentage of revenue from 18.5% to 18.4%. 

Remember when companies used to manage expenses instead of just throwing money at every new technology trend? Adobe does. They’re running a business, not a venture capital experiment.

Adobe sits on 2.5 trillion PDF documents worldwide, 700 million stock assets, and analytics from over one trillion website visits monthly. 

For those of us who remember when data was something you stored in filing cabinets, that’s a treasure trove that would make any AI company drool. They’ve got decades of creative content to train their systems, while competitors are starting from scratch.

The competitive landscape reminds me of the old days when you had one full-service department store downtown surrounded by specialty shops. Sure, those boutiques might excel at one thing, but when you need everything under one roof, you go to the department store. 

Adobe built that department store for creative professionals, and changing shopping habits takes decades, not quarters.

Early AI numbers show real promise. Acrobat AI Assistant usage doubled quarter-over-quarter, Express adoption tripled, and Firefly grew 30% in new customers. These aren’t the explosive growth rates that make headlines, but they’re the steady, sustainable improvements that build wealth over time. 

I’ve seen enough boom-and-bust cycles to appreciate companies that grow methodically rather than spectacularly.

Trading at 15.4 times free cash flow, Adobe looks like the kind of stock we used to snap up without thinking twice. 

Even assuming their AI efforts deliver nothing extra, historical growth rates support a fair value around $506 per share. That’s 48% upside for owning a profitable, growing company with a dominant market position.

The downside scenario requires believing that startups can somehow displace a company that’s spent 30 years perfecting the art of creative software. Having watched plenty of “Adobe killers” come and go over the years, I’m not holding my breath.

Adobe offers something increasingly rare in today’s market: a reasonable price for a quality business with genuine competitive advantages. 

Sometimes the best opportunities come disguised as boring companies doing exactly what they’ve always done, just a little better each year.