Regarding Adobe as a value trap, they don't need to have accelerating revenue growth, but they need to maintain some organic revenue growth (probably MSD). If the long-term moat for the company disappears or revenue growth turns negative, then look out below.
@beelicapital - Thanks so much for reading and for being a subscriber! I always appreciate a well-reasoned pushback on Adobe ($ADBE). I definitely hear your point that mid-single-digit (MSD) organic growth should be the floor for a company with Adobe's footprint. However, here is where I respectfully disagree: in the current environment, MSD growth isn’t just "slow", it’s dangerous.
My concern is the lack of a margin for error. If you’re forecasting 5% to 7% revenue growth, you’re walking a tightrope. If you’re off by just 200 to 300 bps (which is easy to do when AI is shifting the goalposts every quarter), you’re suddenly looking at 3% to 4% growth.
Then, when you factor in 2% to 3% inflation, you’re left with 0% to 1% real growth.
That isn't a "stable" business; that is a business in stasis. To beat the "melting ice cube" allegations, I fundamentally believe Adobe has to consistently demonstrate double-digit (10%+) YoY top-line growth.
The fact that the market essentially shrugged off a massive $25 billion buyback announcement earlier this week is proof for me that investors are no longer moved by financial engineering. They are waiting for a growth story that isn't dependent on a spreadsheet. Until then, the value trap label sticks.
Thanks again for the great comment—keep them coming!
Great piece, really enjoyed reading your thoughts on Adobe. Curious to get your take on something else in regards to $WBD: before we even get to the question of whether PSKY can create value with this asset, how confident are you that the deal actually closes? Just in the last couple of weeks we got the Live Nation/Ticketmaster monopoly verdict and a federal judge freezing the Nexstar/Tegna merger even AFTER the FCC and DOJ had waved it through. Feels like the next domino in the antitrust scrutiny line is almost certainly ParaBros given the scale. combining two of the five major Hollywood studios, HBO + Paramount+, CNN, the whole thing.
Once the Hollywood unions, state AGs, and cable distributors (who got DirecTV to move on Nexstar) start making real noise, do you think the stock takes a serious hit as the arb community starts pricing in break risk? The $4 spread already implies some of this, but it feels like it could widen a lot if things get loud. Would love your thoughts.
Hi @yanvasiutovich, first off, thank you so much for reading and subscribing. I am actually surprised the spread is still so wide, with WBD around $27 against the $31 all cash price. I do expect the WBD and PSKY deal does eventually close.
When I doubt, honestly I look at the prediction markets for a sanity check. Consensus is heavily toward the deal closing...with a delay. For ex, Kalshi is pricing in an ~80% implied probability that Paramount wins.
But as you pointed out with the recent antitrust environment, if the EU Commission opens a Phase II investigation, or if the DOJ/FTC drags their feet on the dockets, it could easily push the timeline well past the September 30, 2026 deadline.
Due to timeline risk, I just don't have the conviction to step in and try to play the merger arb here. Again, a big reason the spread is so wide right now is because Paramount was highly aggressive in pushing this forward, ignoring many traditional M&A and regulatory norms along the way.
PSKY angered a multitude of parties trying to shove this deal through—including thousands of industry professionals who are already petitioning state attorneys general to block it. If this deal gets delayed or ultimately blocked, Paramount will only have themselves to blame.
Thanks again for reading, and let me know if you have any other questions as this saga unfolds!
Thanks for the response! Prediction markets are a cool sanity check I believe they tend to price in a lot of inside info for the near future (until they don't like that soldier betting on Maduro). Good frame for calibrating against the arb spread.
I've been following your TMT Substack closely and really appreciate the work you're putting out. I love this sector and currently wrapping up The Curse of the Mogul but to me it feels pretty stale given how much AI/streaming/YouTube have reshaped everything since it was written.
Any books, newsletters, or other resources you'd recommend for keeping up with the space? Curious what's been useful for you, especially around media economics and how tech platforms are eating legacy distribution.
I would refer you to the valuation part of my article on Adobe. If you reverse DCF to 250 you are looking at 2% growth and 6% margin hit. If that’s where you think this is headed, then you are correct in your assumptions above. It’s still a growth story, but growth is relative. Is 7% good or bad?
@assumptionledger Thanks for reading and subscribing! So I actually sat down and read your full piece, "Adobe is Meta at $90," and I appreciate the rigor you put into the reverse DCF. However, I have to respectfully disagree.
You asked if 7% growth is good or bad — Here is why it’s bad: 7% is essentially the "danger zone" with no margin for error. If your forecast is off by just 200–300 bps (which is a very real possibility given the current pace of AI disruption), you’re at 4% nominal growth. Subtract 2–3% for inflation, and you are looking at ~1% real growth. To beat the "melting ice cube" allegations, Adobe needs to consistently show double-digit (10%+) top-line growth to prove their moat is still intact.
I also think Adobe is the wrong type of company to value with a DCF right now. When a business is going through this level of structural disruption, the two most important variables, the Terminal Growth Rate and the WACC are completely in flux. If you are off by even a tiny bit on your terminal assumption, the entire valuation swings wildly.
Mathematically, a DCF is really just a more complex, "black box" version of a P/E multiple. I prefer to stick to the multiple basis because it's simpler to explain to me and harder to hide optimistic assumptions in.
I respect the "Meta at $90" comparison—but I’m just not optimistic that Adobe has anywhere near the growth profile as Meta. Best of luck on the trade, but I’m staying on the sidelines for this one. Thanks again for reading!
Thanks for having informed strong opinions!
Regarding Adobe as a value trap, they don't need to have accelerating revenue growth, but they need to maintain some organic revenue growth (probably MSD). If the long-term moat for the company disappears or revenue growth turns negative, then look out below.
@beelicapital - Thanks so much for reading and for being a subscriber! I always appreciate a well-reasoned pushback on Adobe ($ADBE). I definitely hear your point that mid-single-digit (MSD) organic growth should be the floor for a company with Adobe's footprint. However, here is where I respectfully disagree: in the current environment, MSD growth isn’t just "slow", it’s dangerous.
My concern is the lack of a margin for error. If you’re forecasting 5% to 7% revenue growth, you’re walking a tightrope. If you’re off by just 200 to 300 bps (which is easy to do when AI is shifting the goalposts every quarter), you’re suddenly looking at 3% to 4% growth.
Then, when you factor in 2% to 3% inflation, you’re left with 0% to 1% real growth.
That isn't a "stable" business; that is a business in stasis. To beat the "melting ice cube" allegations, I fundamentally believe Adobe has to consistently demonstrate double-digit (10%+) YoY top-line growth.
The fact that the market essentially shrugged off a massive $25 billion buyback announcement earlier this week is proof for me that investors are no longer moved by financial engineering. They are waiting for a growth story that isn't dependent on a spreadsheet. Until then, the value trap label sticks.
Thanks again for the great comment—keep them coming!
Great piece, really enjoyed reading your thoughts on Adobe. Curious to get your take on something else in regards to $WBD: before we even get to the question of whether PSKY can create value with this asset, how confident are you that the deal actually closes? Just in the last couple of weeks we got the Live Nation/Ticketmaster monopoly verdict and a federal judge freezing the Nexstar/Tegna merger even AFTER the FCC and DOJ had waved it through. Feels like the next domino in the antitrust scrutiny line is almost certainly ParaBros given the scale. combining two of the five major Hollywood studios, HBO + Paramount+, CNN, the whole thing.
Once the Hollywood unions, state AGs, and cable distributors (who got DirecTV to move on Nexstar) start making real noise, do you think the stock takes a serious hit as the arb community starts pricing in break risk? The $4 spread already implies some of this, but it feels like it could widen a lot if things get loud. Would love your thoughts.
Hi @yanvasiutovich, first off, thank you so much for reading and subscribing. I am actually surprised the spread is still so wide, with WBD around $27 against the $31 all cash price. I do expect the WBD and PSKY deal does eventually close.
When I doubt, honestly I look at the prediction markets for a sanity check. Consensus is heavily toward the deal closing...with a delay. For ex, Kalshi is pricing in an ~80% implied probability that Paramount wins.
But as you pointed out with the recent antitrust environment, if the EU Commission opens a Phase II investigation, or if the DOJ/FTC drags their feet on the dockets, it could easily push the timeline well past the September 30, 2026 deadline.
Due to timeline risk, I just don't have the conviction to step in and try to play the merger arb here. Again, a big reason the spread is so wide right now is because Paramount was highly aggressive in pushing this forward, ignoring many traditional M&A and regulatory norms along the way.
PSKY angered a multitude of parties trying to shove this deal through—including thousands of industry professionals who are already petitioning state attorneys general to block it. If this deal gets delayed or ultimately blocked, Paramount will only have themselves to blame.
Thanks again for reading, and let me know if you have any other questions as this saga unfolds!
Thanks for the response! Prediction markets are a cool sanity check I believe they tend to price in a lot of inside info for the near future (until they don't like that soldier betting on Maduro). Good frame for calibrating against the arb spread.
I've been following your TMT Substack closely and really appreciate the work you're putting out. I love this sector and currently wrapping up The Curse of the Mogul but to me it feels pretty stale given how much AI/streaming/YouTube have reshaped everything since it was written.
Any books, newsletters, or other resources you'd recommend for keeping up with the space? Curious what's been useful for you, especially around media economics and how tech platforms are eating legacy distribution.
I would refer you to the valuation part of my article on Adobe. If you reverse DCF to 250 you are looking at 2% growth and 6% margin hit. If that’s where you think this is headed, then you are correct in your assumptions above. It’s still a growth story, but growth is relative. Is 7% good or bad?
@assumptionledger Thanks for reading and subscribing! So I actually sat down and read your full piece, "Adobe is Meta at $90," and I appreciate the rigor you put into the reverse DCF. However, I have to respectfully disagree.
You asked if 7% growth is good or bad — Here is why it’s bad: 7% is essentially the "danger zone" with no margin for error. If your forecast is off by just 200–300 bps (which is a very real possibility given the current pace of AI disruption), you’re at 4% nominal growth. Subtract 2–3% for inflation, and you are looking at ~1% real growth. To beat the "melting ice cube" allegations, Adobe needs to consistently show double-digit (10%+) top-line growth to prove their moat is still intact.
I also think Adobe is the wrong type of company to value with a DCF right now. When a business is going through this level of structural disruption, the two most important variables, the Terminal Growth Rate and the WACC are completely in flux. If you are off by even a tiny bit on your terminal assumption, the entire valuation swings wildly.
Mathematically, a DCF is really just a more complex, "black box" version of a P/E multiple. I prefer to stick to the multiple basis because it's simpler to explain to me and harder to hide optimistic assumptions in.
I respect the "Meta at $90" comparison—but I’m just not optimistic that Adobe has anywhere near the growth profile as Meta. Best of luck on the trade, but I’m staying on the sidelines for this one. Thanks again for reading!