Adobe's moat is switching costs driven by professional inertia and user incentives, and while AI poses a theoretical threat, the practical barriers to adoption within organizations mean Adobe's creative software ecosystem is more durable than the market believes.

My pick is Adobe. And if anyone is unfamiliar with Adobe, it's a software company. They're known for Photoshop in particular. But now, they have a ton of different apps you would typically use if you're a designer, creative person. They also have something called Digital Experience that's more about analytics. But my pick is Adobe. I guess that's what I'm trying to say. Market cap roughly $100 billion. And it has been growing double digits for the longest time. And it's not only trading at a 52 week low or near that, but near a seven-year low. It traded at 224, not too long ago. At the time of recording, it's 270, so it had a small bump. But the market, like all software or SaaS companies these days, is just unloved. Because at first glance, there is a lot to love. 96% of the $23 billion in revenue comes from subscription revenue. That is exactly what you want to see. Diversified base of more than 41 million paying users. And I mean, if I had pitched this just a few years ago before the era of the LLMs, we'd be all over it. The most important moat, I would say, is switching costs. And I was hinting at before, you can think of Adobe as having two segments. They have digital media, which is 76% of their business. And that's where you have the creative cloud, you have the document cloud where that resides. And then you have digital experiences. That's the enterprise software business that help companies manage marketing, customer data, e-commerce, digital content, and so on. And we're all creature of habits. And as uninspiring as it sounds, inertia is just very good whenever you're thinking about it in terms of a business model. And you also have to consider that people follow incentives. And of course, in this day and age with AI, it seems like it should be a tailwind. Shareholders, management, they want the employees of whatever kind of company to embrace AI. For example, to become more productive or to save on costs, guess what? Most employees do not have the same incentive. They think, and perhaps rightly so, that any efficiency gains doesn't really benefit their paycheck. And worst case, they can lose their own or the coworkers' jobs. And so management and shareholders just are way more excited about embracing AI to cut costs, which very often mean salaries. Even if we are looking away from the financial incentives and job risk and so on and so forth, there is a professional pride in knowing how to use Adobe. If you're a designer and you're taught those tools, you've used it for decades, it's really difficult to embrace a new technology where there is a level playing field for I wouldn't say everyone, but more or less everyone and certainly someone who's entry level who might be making a third of what you're making. Like you don't really have that incentive to stop playing that game. And I'm going to talk a bit more about incentives here, but I think anyone who's been running a business would tell you that whenever you roll out a new initiative, everyone would constantly or subconsciously be thinking, what's in it for me? One of the things I often think about whenever I would make an investment is how does this align with human nature? in this day and age, we see disruption from everywhere, but it's very difficult to disrupt human nature. And so one of the things that I wanted to highlight is like for 99% of people have an easier time spending other people's money than their own. It sounds so passive aggressive whenever I'm saying this. But I think a lot of the AI fears are probably overblown in the sense of how rapid things are going to change. And I'm not questioning at all that AI is going to change a bunch of different things. But I think we sometimes underestimate how much of these changes that need to be almost brute force and how difficult it is to brute force something in an organization. And it is very difficult to get people to understand something whenever your livelihood is depending on not understanding it. And of course, even that there's a limit to. If you don't understand the car and you swore by faster horses, you would eventually have to wake up to the reality. And so I'm not saying that if AI isn't 10 times better and despite the switching cars, then we would eventually have to use something else than say Adobe's products. And of course, whenever you ask the CEO about that, he's saying, oh, no, AI is not going to disrupt us. It's going to be a tailwind. We're going to be so much better because of AI. So I think that's a pretty weak signal. Any CEO that's worth his salt would probably say that today. But I would also be the first to say that a company like the Investors Podcast Network, we are so dependent on Adobe. And we're 20 people on the team. 15 of them are using Adobe. Some of them are just using one app, but most are using the entire suite. and the overall cost is significantly less than 1% of our total cost. So as much as it sounds great, let's use something that's cheaper and it's sort of like a different discussion if it's better, but let's say that this is going to be a lot cheaper. You know, even me as one of the owners of the company, as much as I would like to save on cost, it's just not really a cost saver. And whenever you run a company, and of course it depends on the company, but It's not always the creative people that are paid the most. They are typically one team inside a larger organization. It's the same with TIP. Then you have the salaries. So the people, that's the biggest cost. And then the second biggest cost is typically the equipment. And then a very small part of the cost is the software. So you're looking at something that's very small. So whenever you're doing that, I would say that Adobe is an incredible cheap product for the value that it provides. And I think it's very important that you also, whenever you hear people talking about the cost of Adobe, you would have a lot of people who are saying, it's ridiculously expensive. You know, the freelancer who has a side hustle.

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