adobe systems is one of the largest software companies in the world and it has been a
phenomenal long-term investment yet we don't hear many investors talk about it we think
that's a mistake so we're going to take adobe systems through our checklist and
convince you to put this on your radar my name is brian ferraldi and my name is brian stoffel
thanks to stockcard.io for sponsoring today's video for those that are unfamiliar here is what
brian stoefel's investing framework looks like it's the anti-fragile framework here is the for
all the quality score this is the framework that i use to invest brian for those that don't know
what does adobe systems do so adobe has three main platforms that it sells to its customers and the
first one is its most popular brings in the most in sales and that is adobe's creative cloud these
are things like photoshop illustrator the things that put adobe on the map creative professionals
use them and they're trained on these tools when they're in school the company believes
that it will have an addressable market of about 41 billion dollars by 2023 and even though it's
the largest it is still growing this segment at 22 per year yeah when most people think of
adobe they likely think of photoshop illustrator adobe premiere etc however there's another side
to adobe that is unknown to most investors and that is this company's experience cloud which
is a series of tools that are used by marketers publishers and advertisers to get the most out
of their advertising dollar it also provides a series of tools that help enhance e-commerce
and provide work management data and analytics etc this is a massive opportunity for adobe the
company estimates that a total adjustable market in this category is 85 billion dollars and while
this category has been growing very rapidly it still only scratched the surface of what's
possible here yeah if adobe's able to capitalize on that it'll be a big deal but let's cover the
third platform which is the adobe document cloud it is by far the smallest of the three and in
a lot of ways it's similar to what docusigns business does they do have a tool that helps you
build applications but e-signatures embedded pdfs as a service things like that that is the bread
and butter of this cloud the company believes it has about a 21 billion dollar addressable
market by 2023 and even though it's going up against docusign it is growing at about a 26 rate
over the past three years so that's a little bit about what adobe does and its market opportunities
but let's get to your checklist the mission statement of adobe is to change the world through
digital experiences what do you think very simple i think it's inspirational and it is optional as
we've just seen by going over the three different platforms yeah i like it checks a lot of boxes
for me all right let's talk about the moat do you think that adobe has a network effect i do it's a
weak one but i do believe they have one when they were getting started they gave the pdf reader away
for free and what that did was is that it made a pdf the standard way of sending a document that
wasn't for instance in microsoft word this is a weaker mode than it was in the past but the
fact of the matter is is the traction of everybody using the pdf helped get adobe on the map and like
i said it has become the standard in many schools which in some ways is a similar network effect
taking play yeah pdf is a good example of that if you want to send to somebody a pdf they have to
have a way to read it and vice versa and the more people that have access to that the more useful
that tool becomes and adobe is definitely the standard bearer there uh like you i think years
ago this was much stronger for them i'm personally not going to give them any credit for the network
effect today but i understand why you think they do have one all right how about switching costs
this is the big one this is the most important one and it's because when you start using this
product you're not going to leave the metric that we can look at to prove this is annual recurring
revenue and as you can see year by year quarter by quarter it is growing fast what that means is is
they're not only holding on to their customers and getting new customers but they're getting their
existing customers to spend more with the company and it just stands to reason that this is so
popular and taught in schools that the switching costs are so high you build your whole career
using these tools if you make your income based on your skills in digital media adobe is the standard
bearer for you and it takes a long time to learn all the nuances of how to learn each individual
tool so like you i think that high switching costs is this company's biggest advantage all right how
about low cost advantage i don't believe there's a advantage there i don't think so either how about
intangibles the brand the brand in the industries that it plays in is very strong you could argue
that when it comes to e-signatures docusign has an edge but again that's the smallest platform that
they're dealing with if you look at where they stand in the leadership quadrant in all these
different areas that are analyzed you can see that it is the de facto choice for so many different
tools yeah their brand is synonymous with digital creative tools i think like you it's very strong
okay how about counter positioning i don't think that that's a major advantage anymore yeah in fact
i think other companies sas companies had counter positioning over adobe a few years ago however in
the last five years or so the company has made the transition from a licensing model to a software as
a service model so like you i don't think it's there all right let's talk optionality what do
you see well if we go back to the beginning we just had our pdf and our pdf reader and then
we got the creative cloud photoshop illustrator they moved on to the document cloud and then the
experience cloud which is an enormous opportunity like you said i think that they will use the cache
that they have to move in other directions that help them fulfill their mission yeah one important
thing to note about adobe is not all of its key products have been homegrown many of them were
purchased especially in recent years to grow its its presence in the experience cloud but
like you i believe that this company does have the financial flexibility and optionality built
into it to enter any category that it wants to all right let's talk financials as of june
4th 2021 which is the most recent quarter this company had almost six billion dollars in cash
four billion dollars in debt and almost seven billion dollars in free cash flow i don't love
the amount of debt relative the cash that's on the balance sheet but it almost doesn't matter because
they're bringing in so much free cash flow now one of the reasons that it looks like that is because
they're buying back a lot of their stock which is great for shareholders but i believe that they've
got a certain level of flexibility because they could turn those buybacks off and switch their
balance sheet to be enormously cash positive if they wanted this company generates so much
free cash flow coming in like you i'm not thrilled about the debt but i'm not worried about it at all
all right concentration risk nothing to worry about great to see all right glass door these
are stellar scores 4.4 stars and a 98 approval rating for ceo yeah ceo and orion he is one of the
highest rated ceos in all of technology i think he is dramatically undervalued his employees really
seem to love him the returns that he has delivered for his show has been absolutely incredible i
think adobe has one of the best cultures in tech all right founder so the founder is still involved
for as old of a company as this is dr john warnock used to be the chairman and ceo of the company
he's no longer in the c-suite and he's no longer the chairman but he is on the board of directors
love to see that that's actually really surprising given how long this company has been around for
all right ownership so the ownership levels are less than desired for my framework as of march
2021 warnock and ryan owned less than one percent of shares outstanding all insiders combined less
than one percent that said on a nominal value the insider holdings was still worth over 700 million
dollars this is not uncommon for a company as old in software speak as old as adobe is yeah
this is one of those cases when the percentages do not look impressive but insiders still have
730 million reasons to want to see this stock go higher all right before we get to the final scores
wanted to give a shout out to our channel members especially to matthew jones and mark holtz thank
you so much for joining we really appreciate it if that interests you you get access to badges
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if that interests you just click the join button all right brian let's take it to your framework
where'd you get permission full credit i thought i checked all three boxes great mo
so i'm gonna give them half credit for the network effect maybe that's generous full credit for the
switching costs and full one point for the brand it to four points awesome optionality i give them
two points maybe that's a two and a half points maybe that's a little bit generous but i just see
that they could move on to different platforms and although it's still software as a service they're
different industries that they're going into okay financials i give them uh full credit because
they have so much free cash flow the debt doesn't bother me okay concentration nothing to worry
about there glass door give them full credit great scores founder still involved dr warnock's
on the board and ownership and i'm there i take a point off again when you take certain things
into consideration maybe i'm being a little unjust but for consistency's sake it's under four percent
i think you're a little overly generous on the network effect so that all counters itself out
there you add that together and you get a 10 and a half that's a really good score it's a great score
clearly robust anti-fragile company all right let's take it through my framework real fast
so financially this company is unbelievably strong i gave them a 16 out of 17. on the moat i also
think this company has a wide and enduring moat so i gave them a 20 out of 20. for potential i
only gave them an 11 out of 18. one of the reasons is this company has experienced so much operating
leverage in recent years i don't think they have a lot of operating leverage ahead of them
for that point i took a couple points off for customers very high quality relationship with
their customers i gave them a 9 out of 10. the revenue quality here is stellar it's recession
proof and it's recurring love to see that the culture is very very strong i gave them a 12
out of 14. the stock checks so many boxes for me not only does the stock thumped the market
and they regularly beat their their investments they use their cash hoard to buy back stock and
for the gauntlet i subtracted one point because this company gets a lot of its revenue overseas
that can do some wonky things with currency but you add all that together and for me this got an
86 which is well into my high quality business category that is a very high score in your
framework for mine it wasn't quite as impressive but it was still a 10 and a half which is a very
strong score i think for both of us there's no doubt that indori is a highly investable idea
now to hold ourselves accountable we're going to head on over to stockcard.io and we are going to
enter that into brian's portfolio and my portfolio so we're going to go down and we're going to add a
new order the ticker symbol here is adbe for adobe we are recording this on monday september 20th
so that's when we're going to be doing the buy this is a 654 stock so we're going to be buying
two shares each and for you brian you've got an anti-fragile score of 10.5 and we're going to
submit that and we're going to head over to my portfolio which is the brian for all the
quality checklist score and we are going to do the exact same thing the ticker symbol is a dbe gonna
do a buy decision we're gonna do it on today's date we're gonna buy two shares and a score of
87. thank you stock card for sponsoring today's video if you want to see our portfolios in action
you can head over to stockcard.io and use the code antifragile to get 10 off the premium subscription
brian adobe is a company that checks so many boxes for me it's a stock that i have personally owned
for years and i can easily see myself owning for many more to come yes and though i don't own it
myself it has more to do with the fact that you can't own every single great stock that there is
in the market yeah i hope that this puts it on the radar of investors that's our goal all right well
thank you so much for watching this what stock do you want us to research next let us know in the
comment section below my name is brian ferraldi and my mission is to spread financial wellness and
my name is brian stoffel my mission is to publish the rules of finance for anyone to see brian's out