ADBE

This $26 Billion Unicorn Is Gunning for Adobe

When it comes to creative software, Adobe (NASDAQ: ADBE) is the undisputed king. The company offers Photoshop for images, Premiere Pro for videos, Illustrator for graphics, and a slew of other applications..

Adobe's products are so widely used by professionals that competing with the software giant is tough. Switching costs are just too high for users. Still, competition does exist. Some competitors cater to those looking for more affordable solutions, or to those who just want to buy a piece of software once rather than on a subscription.

Canva makes a key acquisition

Canva is a privately held company that offers an online editor aimed at creating graphics for social media, presentations, and other uses. Canva targets the non-technical crowd, allowing anyone to create visual content without needing to navigate a complicated application with a steep learning curve.

Canva has grown into a major player in the creative software industry. Annualized revenue reached $2 billion in 2023, and the company was last valued at $26 billion. There's some overlap between Canva and Adobe, but not much. Adobe Express is the company's Canva-like tool, but Adobe's more complex products are the real moneymakers.

Canva announced last week that it was acquiring Affinity, a software company that sells products similar to Adobe's core offerings. While Adobe's software may be more powerful, Affinity has grown its customer base to more than three million despite the advantages Adobe holds.

One reason for this success is Affinity's refusal to adopt a subscription model. Affinity's products are bought once, and they're surprisingly affordable. A license for Affinity's full suite of products is $114.99, while Adobe Creative Cloud users must pay $59.99 every month.

While Canva may integrate Affinity's products into its subscription plans or launch new subscription plans, the two companies have publicly pledged to always offer perpetual licenses for Affinity's software.

A real threat to Adobe

With the Affinity acquisition, Canva is now able to target "the full spectrum of designers at every level and stage of the design journey," according to the press release announcing the deal. While Adobe is unlikely to feel any pain in the short term, given how entrenched its products are, Canva is coming for its customer base.

Canva has more than 170 million users, although only a portion of those users are paying customers. Big companies use Canva's platform, including over 90% of the Fortune 500. For companies that need the services of an easy-to-use platform like Canva and complex editing software like Adobe, Canva will soon be able to pitch itself as an all-in-one solution.

Canva's push into Adobe's territory comes at a time when Adobe is struggling to accelerate its growth. Despite Adobe's push to integrate AI into its products, revenue grew by just 11% year over year in the first quarter of fiscal 2024, and the company's outlook calls for just 9% growth in the second quarter.

Adobe stock also looks expensive. Shares trade for more than 11 times forward sales and 30 times forward adjusted earnings. Canva has room to undercut Adobe dramatically on price if it chooses to launch subscription plans for Affinity's software suite, a move that could eventually put pressure on Adobe's margins.

The inertia behind Adobe's products may be enough to fend off any challenge from Canva. However, Canva represents the most meaningful competitive threat to Adobe's dominance in years. Investors shouldn't ignore the possibility that Adobe's sky-high margins and pricing will come under pressure as Canva goes after Adobe's customers.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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