Why The Adobe Sensei-Powered Creative Cloud Is Important

Summary

• It is estimated that there are 15 million paying customers of Creative Cloud.
• Annual revenue from Creative Cloud is still Adobe’s biggest sales generator at $5.34 billion.
• AI-assisted or generative creativity helps designers and content creators earn more money more quickly.
• Happy customers who make good money from using Creative Cloud software products help prop-up the high valuation ratios of ADBE.

I reiterate my January 29, 2019 buy rating for Adobe (NASDAQ:ADBE). Adobe’s current stock price of $278.29 is notably higher than ADBE’s January 29 trading price of $238.27. ADBE touts a 20.32% YTD return, but I think this highly-valued stock still has more upside potential. Going forward, the Sensei artificial intelligence (AI) platform can fortify Adobe’s pseudo-monopoly on design/content creation software.

Sensei can enhance Adobe’s $5.343 billion annual recurring revenue from Creative Cloud. A stronger Creative Cloud revenue stream can help ADBE finish 2019 with a YTD return much higher than 20.32%.

(Source: Seeking Alpha)

A persistent pseudo-monopoly on multimedia design software can support ADBE’s high valuation ratios of 49.69x TTM P/E, 13.95x P/S, and 13.47x P/B. Adobe’s stock price can shoot up if it can keep improving its $1.495 billion/quarter revenue from Creative Cloud.

(Source: Adobe)

Based on the chart above, Creative Cloud is contributing 59% of Adobe’s annual revenue. Adobe infusing artificial intelligence features in Creative Cloud software products was judicious. The time-saving features of Adobe Sensei can help increase the estimated 15 million paid subscribers of Creative Cloud.

(Source: Adobe)

Time is money in the creative industry. Adobe’s future long-term prosperity is excellent. Adobe Sensei is accelerating the workflow of content creators and designers. The faster they finish their projects, the more money for creative professionals. Content creators and designers who make good income will remain long-term paying customers of Adobe.

Retaining and growing the 15 million paying customers of Creative Cloud ensures Adobe remains the no. 3 leader in the $20 billion/quarter enterprise SaaS business.

The Economic Benefit of Sensei AI-Enhanced Creativity

Artificial intelligence or generative designing made Creative Cloud more sellable. Even non-artistic individuals will find it comfortable to use complex software programs like Photoshop, After Effects, and Illustrator.

We can guesstimate that attracting 3 million more (AI-assisted or AI-inspired) subscribers can add an extra $1.1 billion to Creative Cloud’s ARR (annual recurring revenue). Adobe’s FY 2018 revenue was $9.03 billion.

Going forward, we can infer that Sensei + Creative Cloud has the potential to boost Adobe’s annual revenue by 12% ($1.1 billion divided by $9.03 billion). For the past 10 years, Adobe’s average sales growth rate is less than 11%. Adobe Sensei is very important because it can help ADBE maintain its 10-year sales growth performance.

(Source: stockrow.com)

Generative Or AI-Assisted Design Is Legit

The universal desire to earn more money through faster means justified the launch of the Sensei AI platform. My fearless assessment is that generative or AI-assisted design/content creation is becoming mainstream. Sensei AI-enabled Creative Cloud is just riding what is now fashionable. Autodesk’s (ADSK) very popular Fusion 360 also offers generative CAD/CAM design workflow. Another popular CAD/CAM software, Rhino, does generative designs. Open-source 3D software Blender offers generative content creation.

We subscribe to the $9.99/month Photoshop CC/Lightroom Classic Photography package. I love the Sensei AI-enabled Photoshop features like the Content-Aware Fill and Select Subject. These AI-assisted capabilities help us avoid the tedious task of replacing unwanted background/elements. I dislike tiresome 3D modeling and visualization. However, the machine learning features of the $19.99/month Adobe Dimension CC product is tempting me.

The point is that Sensei AI enhancements are compelling customers like me to subscribe to other Creative Cloud products even though we lack the skills or the ready market for them.

Adobe Sensei’s generative usefulness is greatly illustrated by Adobe Spark. The AI-assisted way to generate layouts and color themes based on a chosen online template made Adobe Spark a must-have for graphic artists. No other online templates-driven, do-it-yourself or DIY graphic design websites can match the Sensei-powered usefulness of Adobe Spark. DIY commercial graphic design sites like Canva, Snappa, PicMonkey, and Easil do not have the AI graphic design IQ of Adobe Spark.

Deadline-pressured content creators/artists need Adobe Spark to rapidly produce designs with different AI-generated layouts.

(Source: Adobe)

The quick way to generate/pick color themes on designs is a highly desirable feature of Adobe Spark.

(Source: Adobe)

There’s no point paying $12.95/month for Canva’s pro plan when I can get Adobe Spark for free with the $9.99/month Photoshop CC subscription. My fearless forecast is that the Sensei AI-infused Adobe Spark will eventually kill unicorn companies like Canva and Easil. Adobe Spark makes Canva's billion-dollar valuation a dangerous mirage.

Conclusion

Raise your bets on Adobe. Do not be scared of ADBE’s elevated TTM P/E ratio of 59.69x. ADBE’s historical P/E valuations used to be as high as 150x. Adobe's past 10-year sales growth rate of almost 11% will persist because there's almost-zero competition for Creative Cloud.

(Source: MacroTrends)

The growing $980 billion/year printing industry and the massive $1.838 trillion/year global apparel business are boosting the need for more users of Adobe Creative Cloud software products. More designers are needed because there’s a rising demand for more printed packaging, advertising, clothing, content creation, and product prototyping/manufacturing.

I do not see any serious downside to Creative Cloud. Adobe's current rivals Corel Corporation, Serif Software, and Magix are too small to match the AI-infused capabilities of Adobe Creative Cloud. I do not think Corel has the financial capability to build a cloud-based AI platform that can match Adobe Sensei’s scope. Nvidia (NVDA) AI chips powers Adobe Sensei. It takes thousands of pricey deep-learning/machine-learning Nvidia Tesla P100 or V100 processors to service the 15-million strong Creative Cloud ecosystem.

(Source: Brett Newman/Microway, Inc.)

Software giants like Microsoft (MSFT) and Autodesk have given up. Those two heavyweights could have disrupted Adobe's pseudo-monopoly on creative/design software years ago, but they never made any serious effort. Microsoft is content renting out Office 365 and is tightly allied with Adobe in cloud and AI computing.

Disclosure: I am/we are long ADBE, ADSK, MSFT, NVDA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.