When it comes to graphic design, editing videos, or developing websites, Adobe (ADBE -0.35%) is the gold standard by a wide margin. The company's software suite spans a variety of creative applications, and has helped Adobe build a formidable economic moat. But as is the case with many large enterprises, competition eventually comes knocking.
An Australian-based start-up called Canva offers a multitude of services that are similar to Adobe's. In late March, Canva acquired professional visualization company Affinity for a reported $380 million as it looks to encroach on Adobe's territory in the professional design market.
Let's discuss how this deal bolsters Canva's business, and what it could mean for Adobe's growth prospects.
Assessing Adobe's growth
The chart below illustrates Adobe's quarterly revenue over the last 10 years. One thing is pretty clear -- Adobe's sales growth is impressive.
ADBE Revenue (Quarterly) data by YCharts.
But like many behemoths, growth eventually begins to decelerate. This makes sense as businesses, like people, go through different cycles and eventually reach a maturity point.
In its first quarter of fiscal 2024, ended March 1, Adobe reported record revenue of $5.2 billion. While this may look encouraging on the surface, there is more to unpack.
First-quarter revenue only grew 11% year over year. This level of growth may appear mundane for some investors, especially considering that Adobe is utilizing generative AI across its platform. What's more is that management is calling for about 9% annual revenue growth for the second quarter.
Investors were not pleased by these forecasts, and shares of Adobe slid on the disappointing outlook. While Adobe is still undoubtedly the 800 pound gorilla in creative and professional visualization software, the company's plateauing growth may shed light on a stark reality: Real competition has finally arrived.
Image source: Getty Images.
Competition is heating up
In September 2022, Adobe made headlines with its proposed $20 billion acquisition of Figma. The deal looked like a home run, as Figma represented a way for Adobe to further expand outside of creative applications and complement the company's productivity and collaboration tools. Unfortunately for Adobe, the deal was abandoned in December following an uphill regulatory battle.
In the aftermath of the Figma deal, Canva made a move of its own by teaming up with Affinity. With 175 million users on the platform, Canva has clearly demonstrated that it can acquire a critical mass. But even so, the company has primarily targeted "knowledge workers without design training."
In essence, Canva is a recreational tool for the casual designer. By contrast, Adobe offers sophisticated products for professional creators. However, Affinity bridges this gap for Canva because its "professional design software now unlocks the full spectrum of designers at every level and stage of the design journey," according to the company.
Should Adobe investors be worried?
The basic templates that Canva offers combined with more professional-grade tools from Affinity put the company in direct competition of Adobe. Moreover, new tools such as DALL-E from OpenAI, among other competing platforms, are flooding the market and placing even more pressure on Adobe.
While the competitive landscape is intense, there is a silver lining here. Namely, I don't see a meaningful portion of Adobe users leaving the platform for Canva or its counterparts. Maybe some will seek lower-cost alternatives, but I think the majority of Adobe's user base will remain. Ultimately, the company's comprehensive ecosystem of product offerings remain sticky.
In a way, this theme is demonstrated in Adobe's financial results. Even though the company isn't generating high-double-digit growth rates, Adobe's record sales demonstrate that the majority of its user base continues to pay the subscription fee and remain on the platform.
The bigger threat I see is Canva may begin to take away new market share from Adobe -- impacting Adobe's long-term growth trajectory.
For now, I wouldn't worry too much about Adobe. The company still holds a commanding lead in the creative market. However, Canva's acquisition of Affinity should serve as a wake-up call for Adobe, and a reminder to management not to rest on its laurels.
I think the company needs to identify additional areas for growth in order for Adobe to differentiate itself from competition in the long run. If it fails to do that, Adobe may turn into a slow-growing business in an otherwise high-opportunity market.
