AI is fueling a new wave of tech investment, with U.S. companies already pouring in over $300 billion. Projections show that the biggest names will spend trillions more in the years ahead. True winners won’t just be those building AI but they’ll be the ones who can monetize it. In today’s FA Alpha Daily, we look at how Adobe is turning cutting-edge AI into real business gains and what the market may be missing.
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Artificial intelligence has been at the forefront of the market for the past two years, as new advancements in technology continue to demonstrate industry-altering potential.
Companies in the U.S. have invested more than $300 billion in AI over the last five years.
And it’s projected that the largest tech companies like Meta, Microsoft, and Alphabet will invest $1 trillion or likely plenty more themselves in the next five years.
While the next few years will lead to the birth of a plethora of new technologies, the real winners will be the companies that are able to use AI effectively and monetize their solutions.
Everybody knows Adobe (ADBE) is the leader in the creative software space.
More than 50% of creative businesses and almost 90% of creative professionals worldwide use Photoshop. Additionally, Adobe Acrobat holds over 75% of the PDF reader market share.
The Creative Cloud as a whole holds more than 80% of the creative software market share.
By the end of 2017, Adobe had over 12 million paid subscribers. This number increased to 22 million in 2021, and now sits at 33 million, with annual recurring revenue growing more than 10% in 2024.
Adobe is crediting this massive subscriber base expansion to its new AI offerings.
The company introduced powerful AI features through its Sensei platform and generative AI models like Firefly. These are not just minor updates…
The new AI Assistant in Adobe Acrobat allows users to quickly summarize and find information in long documents, while generative AI in Photoshop streamlines complex editing tasks that once took hours.
This integration serves a clear business purpose: To attract new subscribers and encourage existing ones to upgrade.
By offering tangible improvements that save users time and effort, Adobe can justify higher subscription fees and create new, premium service tiers.
The company is also exploring other monetization opportunities for its generative AI offerings, like compensating stock photographers for work contributed to Adobe Stock, which is then used to train AI models.
All these factors enabled Adobe to achieve a strong 66% Uniform return on assets ”ROA” last year.
However, the market is concerned that the company may not be able to sufficiently monetize its expanding generative AI capabilities and offerings like Firefly, and that future growth could slow down if these new services do not generate meaningful new revenue streams.
We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 58% instead of continuing to climb like Wall Street predicts.
While it is still early in Adobe’s journey to commercialize AI, the signs so far have been positive.
Firefly has already seen strong adoption from creative professionals since its launch in 2023.
The company has also demonstrated its ability to quickly integrate new AI technologies into its market-leading creative cloud products.
Adobe is likely to continue growing by integrating these new AI-first offerings more deeply into its workflows.
Best regards,
Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research
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