Druckenmiller's prediction of a flat decade and why Adobe's acquisition of Figma is a bad sign for shareholders.
Adobe more like Ahhhh don't.
Hello Coffeedrinkers and Chai Lovers alike,
Thank you for all the great travel tips for India. The flight is on Thursday and I am looking forward to it.
Druckenmiller's prediction of a flat decade
In a recent talk Druckenmiller gave with Palantir (which was basically a 45 min ad for them), there were a few flashes of brilliance.
He predicts that the long term bull market that we were in since 1982 has ended and that the next decade might be flat. This is due to more regulation, a starting de-globalisation, rising interest rates and rising energy costs. Basically all the factors that were responsible for the bull market are reversing or have already done so.
While this is bad news for index investors, I think the next decade will see great returns for bottom up investors and macro investors alike. The greatest returns are often made in turbulent times, and I don't think we'll be short of those in the next decade.
Why Adobe's acquisition of Figma is a bad sign for shareholders
Here is a great threat why it makes sense for Adobe to acquire Figma.
It does increase their monopoly in the creator industry. Figma's product is superior to Adobe's XD. Additionally it removes a competitor and allows Adobe to use Figma's great collaboration features. The market didn't like the deal, and the stock is down 22% (more than the acquisition cost of $10b in cash and $10b in Adobe stock). Now people talk about that Adobe is the cheapest it has been in the last decade.
I think it isn't cheap and it shows several problems with Adobe.
Adobe had great tailwinds the last decade. The creator economy took off and with it the money that could be made with casual or semi-professional creators. In addition the Internet and Youtube Videos became wide-spread increasing the demand for ads in that space. Adobe was, and still is the biggest provider of software in that space. Furthermore, the introduction of subscriptions lowered the barrier of entry for casual creators and increased revenue and margins dramatically.
It also increased competition. Affinity Photo, DaVinci Resolve, Foxit PDF, Canvas and Figma are all trying to take away market share from Adobe. Talking with a few friends who are freelancers or work for ad agencies, a small shift is already taking place.
These changes take a long time, and then seemingly all at once. Avid Pro Tools was basically the only choice when it came to Audio Production in the 2000s. Now we have Ableton Live, Studio One, Logic Pro X and Cubase all being viable and sometimes even more popular alternatives.
As I said these changes are usually gradual, but with Figma it wasn't. Figma had it's first release in 2016. At its basics it was a browser based Sketch, used for UI/UX design and introducing easy collaboration. It is a popular tool and quickly took market share away from Adobe. So quickly that it is now acquired for around $20b. Seeing how the quality of the Adobe tools deteriorated, getting bloated with more crashes, the move is not very popular among the users of Figma.
The current CEO of Figma tells us that nothing will change and that Figma will be autonomous and pricing will stay the same. Which would be even worse for Adobe shareholders (they paid 50x P/S for that company, you need to see some returns as shareholder).
Additionally a software engineer at Adobe said at the Hackernews Forum that it is reminiscent of Microsoft's anticompetitive behavior in the early 00s. And indeed it is.
It also reminds me of what Steve Jobs said in this interview:
"It turns out the same thing can happen in technology companies that get monopolies, like IBM or Xerox. If you were a product person at IBM or Xerox, so you make a better copier or computer. So what? When you have monopoly market share, the company's not any more successful.
So the people that can make the company more successful are sales and marketing people, and they end up running the companies. And the product people get driven out of the decision making forums, and the companies forget what it means to make great products. The product sensibility and the product genius that brought them to that monopolistic position gets rotted out by people running these companies that have no conception of a good product versus a bad product.
They have no conception of the craftsmanship that's required to take a good idea and turn it into a good product. And they really have no feeling in their hearts, usually, about wanting to really help the customers."
That Figma can grow so fast and that Adobe needs to acquire them at a premium is worrying for all their products.
We were told they had a moat. What moat is there, if a startup can disrupt it in less than 6 years. And Adobe is scared. They gave up more than 12% of the company's enterprise value for a company that created 1-2% of Adobe's revenues.
Not only doesn't Adobe stopped creating great products, but they seem to have problems with capital allocation as well.
From 2017-2021 the company spend more than $10b to buyback 20 million shares at an average price of around $600 per share. Now they issue that $10b at half the valuations to acquire Figma. So the shareholder's cost for that acquisition is extremely high. Figma last year was no unknown. It was an oversight of Adobe's management to not acquire them, when their shares were trading at 50x EV/EBITDA. Instead they use their now discounted shares to buy a company at 50x Sales. If in the future Adobe's share increase in value, so does the price they paid for Figma.
Shareholder destruction at its finest.
Even at current levels a lot of expectations are backed into Adobe's stock price.
If we assume the same margins and a 25x EV/EBIT multiple, to get the same return as an index at current prices, with the high SBC (share-based compensation), we would need 15% growth from year 1-5 and 10% from year 5-10. Given the growth of the last decade, that is their big ask. Especially given that one of their biggest customer bases are advertising agencies and there is a limit to how fast that growth can happen. If we require a 15% return (which is still way too low in my taste), the company would be valued at $174 today.
But there would be no margin of safety, no potential multiple contraction and no contraction of margins. Looking at the action of management and their competition eyeing the margins that Adobe currently has, the company would be incredibly expensive at $174. Assuming a future margin and multiple contraction and a good margin of safety - I would not look at Adobe above $120.