Breaking Down EVERY Adobe BEAR Case; Explained

[00:00:00]Hey guys, welcome back to the Value Investor Show. Thank you so much for your love over my last few videos.

[00:00:05]Today, I want to break down every single one of Adobe's bear case because I feel like Adobe is the most hated stock currently in the market. So, for today, I'm going to go through the four main bear cases of Adobe. I'm going to go through the current case, what the current data suggests, as well as my probability and my opinion of whether this is happening. Starting off with bear case number one, Canva, Figma, and other freemium tools or even other tools will destroy Adobe. Everyone have been talking about Canva and Figma time and time again. You really get sick of it, but I'm going to tell you why I think this case doesn't really apply in reality and what needs to happen in order for it to apply. Starting off with the fact that Figma and Canva were founded in 2012 and 2011, respectively.

[00:00:57]Since then, Adobe has only grown multiple times. In fact, since then, Adobe has managed to 6x their revenue, 8x their net income, and 8x their free cash flow. So, in fact, Adobe has still been able to grow even since these companies were founded. Now, is Adobe actually being destroyed by competitors even more recently? Well, Adobe is still growing even more recently. It's not shrinking. Revenue was 13% up year over year last quarter, and a company that is being destroyed by competitors does not compound with 89% gross margin. Canva is genuinely formidable. It was at $6 in 2025 with $4 billion ARR, which was up 43% year over year. So, Canva, in fact, is growing massively. They have 265 million active users, and 31 million of them are actually paid users. And they have actually been also profitable for eight straight years. Their last valuation was back in August 2025 at $42 billion and it recently acquired Affinity and Leonardo AI to really up market and own AI models with a likely IPO of this year. Then you have Figma as well, which survived independence because Adobe was subject to buy Figma for 20 billion back in December 2023, but regulators blocked it and Adobe even had to pay $1 billion reverse breakup fee. But guess what?

[00:02:26]Since Figma became a public company, it's now down 85% and it's now actually a $9 billion market cap company, less than half of what Adobe was willing to pay back almost 3 years ago. Now combined Canva and Figma ARR currently is around $5 billion, which is a lot less than Adobe's $24 billion ARR. And in fact, a lot of investors fail to understand that these companies overlap only partially. And why I say this? Because Canva owns the non-designer SMB tier. So, people like myself who are not designers, people like small companies that want to do something quick, something that they couldn't have done before, they use Canva. Figma on the other hand, they own a collaborative UI UX interface where Adobe has already exited. Adobe's target market has always been the professional creative document PDF and also the enterprise experience stack. Adobe focuses on professional services that offer designer services for their business model and that is why Adobe is different from Canva and Figma and they only partially overlap. The fifth point here is pricing power because Adobe is still raising prices. It's not cutting prices in their creative cloud pro tiers and it's bundling AI tool defend ARPU.

[00:03:52]And then finally, Canva's expanding the total creation market and taking seats that Adobe was never going to monetize anyway because as we said, Adobe and Canva have a different target market.

[00:04:04]Now, in my opinion, this bear thesis plays out if Canva Enterprise client becomes a true Creative Cloud and Experience Cloud replacement, not just a marketing team tool for beginner beginners like myself. And if AI collapses a skill premium that justifies professional tools and Adobe fails to defend it with its own AI native lower-price surfaces, for example, Firefly and Express, we might have a situation where indeed Canva, or even Figma, or even new players take significant market share from Adobe. In my opinion, the probability of this happening is 20%, which takes me to the second bear case, which is AI will kill Adobe and designers won't exist. But before we break it down, to show you guys that Adobe is still growing. It's growing across its gross profit margin year over year. It's growing across its total revenues year over year, and even on their free cash flow. And yes, growth has been growing at a slower pace, but that is very common, especially for a company that matures, that becomes larger in size. But the fact that growth is still there, even at double-digit growth, and even with growth actually kind of accelerating the last two quarters, this is important to flag.

[00:05:19]Back to the bear case that AI will kill designers, designers will cease to exist in the future, and they won't even use Adobe products, as well as the seat-based model will fail. Starting off with the fact that designers are not actually disappearing, but their role is shifting. Now, the only bearish and important data point here is that the WEF 2025 Future Report does rank graphic designers as the 11th fastest declining role of the future, and it's explicitly tied to AI. But you also have other roles here like accounting, like assistants, like secretaries that also have even larger declines in the future.

[00:05:57]But against that, the industry revenue is projected to grow from 45 billion to 70 billion by 2032 and 75% of designers now use AI and 67% treat it as a complement. The second point here is a freelance demanding is holding not collapsing. Upwork's 2026 in-demand skills report found creative demand resilience with AI-enabled skills up 109% year-over-year and AI video generation and editing up 330% year-over-year. Even early macro evidence from Anthropic's labor market research finds no clear negative employment effects yet in the most AI-exposed occupation. So it feels like there is a shift towards the way these designers approach their work rather than head count annihilation. Thirdly, Adobe's monetizing the disruptor not being bypassed by it. AI first ARR exceeded 500 million and tripled year-over-year in the second quarter of this year. Adobe has pushed a generative Firefly across Photoshop, Illustrator and other products. And finally, Adobe is intentionally trading away near-term individual subscriber ARR growth in the second half of 2026 to build a larger free base that it intends to cover later. And it has not yet disclosed the conversion rate, revenue per converted seat or time to convert. And until that data exists, the freemium pivot can't be read either as calculated investment or as an unqualified cost. And I will dive into this a little bit afterwards. So in my opinion, the second thesis plays out if generative AI compresses the per seat economics faster than Adobe can reprice towards consumption or AI revenue. For example, if seats fall faster than AI AR rises and the premium funnel converts at a lower rate or lower ARPU.

[00:07:54]This is probably the highest and most risky bear thesis out of all of the four that I will talk through today. In my opinion, the probability that this happens is 40%. It's probably the most impactful bear thesis if it goes through and it's directly related with every single one of the rest, which takes me to the third bear case. Adobe is going bankrupt just like Blockbuster, just like Kodak. So, just like Blockbuster, the same will happen with Adobe. This is what people are saying. But, Blockbuster's killers were specific to its structure. It was a transactional non-recurring model. They had physical store fixed costs. They had a lot of debt taken on a fund at 2004 spin-off dividend and a management that passed on buying Netflix at $50 million. Adobe has the inverse of every one of those traits because it actually has a modest net debt. It's capital allocation choice.

[00:08:44]It's funding buybacks and it recently bought Semrush, which covered roughly 7x by a single year's free cash flow. And if you actually compare Blockbuster to Adobe, every single one of the metrics either profitability, either gross margins, operating margins, these are much higher. These are among the highest of the S&P 500 for Adobe versus for Blockbuster, it was only profitable a few years. Its operating margin was marginal to negative. You had a chronically weak free cash flow. It had massive debt. It had a secular decline as well as ongoing doubt on revenue as well as their revenue model. Whereas for Adobe, Adobe is still growing double digits. In my opinion, this thesis plays out only if there's a simultaneous collapse of subscription revenue, so bear case two at its most extreme and disappearance of pricing power as well as a debt funded mistake large enough to matter against a 10 billion per year free cash flow that Adobe is generating.

[00:09:45]For me, this is the lowest probability I will actually happen and I give it a probability of 2%, which takes me to the final bear case and one that a lot of people have been flagging lately. So, insiders are not buying, the CEO and CFO is leaving, Adobe is a shipwreck, and everyone is getting out. And before I dive into and break this bear case, I want to show you that Adobe is buying back shares very aggressively. I mean, the current buyback yield sits at the highest point it has ever been at 11.3% and the management is currently investing heavily into buying back their business because they believe that the business is heavily mispriced. And in fact, the CEO said that Adobe is the best place company to leverage AI and benefit from it. Now, what is the actual risk from management changes? Well, firstly, the CEO is leaving. The CEO announced that he will step down and he will basically retire. He has been the CEO for a very long time. He has been very successful in turning Adobe into a seed-based conversation model and they're still evaluating external candidates. The CFO is also leaving. Dan Durn is becoming the CFO of Marvel and actually for a lot of people that don't know, Dan Durn had historically been a CFO for multiple chips and semiconductor companies and he's going back to that industry, which makes sense for him.

[00:11:03]Insiders are not buying as well, which is true, but is also normal because over the trailing 90 days, Adobe insiders were net sellers of 18 million with no open market purchases. April 2026 in fact saw five transaction sellings and everyone is jumping the shipwreck. This is actually overstated because the 18.7 of net selling is trivial against the 78 billion market cap for mega cap tech near zero open market buying at steady ARR as you driven. Selling is the baseline and not a distress signal. And a lot of people need to understand that mega-cap tech executives are compensated overwhelmingly in stock options and essentially never buy in the open market. So, insiders aren't buying because they have skin in the game. They already are leveraged and have a lot of stocks under their name. And insider selling doesn't carry a large signal.

[00:11:53]Second and more substantially, the genuine risk is not that the departure signals to is the execution risk of the leadership vacuum that has been created during this AI transition. With a CEO that is set to leave and an interim CFO, an external or internal succession still unresolved all at the exact moment that the premium AI repricing needs steady hands is creating uncertainty and investors don't like uncertainty. In my opinion, this this is plays out if the board makes a poor succession choice, particularly an external hire who misreads AI premium transition triggers strategy turn or loses key talent while the interim CFO period outputs uses guidance or capital allocation missteps.

[00:12:36]I think there is a probability that this happened, but I give it a probability of 15% in my opinion. Hope you guys enjoyed. Thank you so much for the support. Actually, 84% of you are not subscribed. So, if you can click that subscribe button, it would mean a lot.

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[00:12:57]Thank you so much for watching and I'll see you guys in the next one.