Creative AI

In this edition of the Smart Investor newsletter, we examine an undisputed creative technology leader. But first, let us delve into the latest Portfolio news and updates.


Portfolio Stock Updates

❖ Super Micro Computer (SMCI) will join the Russell 1000 Index, which represents the 1000 top companies by market capitalization in the U.S., on June 28th. As the index undergoes its annual recalibration on June 28th, 38 stocks will be added to its ranks, including shares of seven tech companies.

❖ Arista Networks (ANET) stock slid over the past week after Nvidia (NVDA) voiced its networking ambitions, raising competitive concerns for the company. Analysts are in disagreement about whether the launch of Nvidia’s Spectrum X for Ethernet, expected next year, will significantly impact Arista’s business, given its leading position in the cloud AI networking sphere. In addition, the AI switch market is expected to reach over $7 billion in 2025 and continue its fast growth for years to come. This should provide sufficient market depth for these industry leaders, as well as for partnerships beneficial to both.

❖ American International Group, Inc. (AIG) has announced a dividend hike, raising its quarterly payout by 11% starting from the payment scheduled for June 28th.

❖ PayPal Holdings (PYPL) stock was acquired by Cathie Wood‘s ARK Invest. The hedge fund bought almost $10 million of PayPal’s shares, reflecting growing confidence regarding the digital payment company’s prospects. In other news, PYPL said it plans to build an ad sales business using consumer purchasing data it has acquired through its payment networks. The Ads division is expected to boost PayPal’s revenue growth considerably.

❖ Stellantis N.V. (STLA) has begun the second phase of its 3 billion euros ($3.25 billion) share repurchase program announced in February. Accordingly, the company aims to buy $1.09 billion worth of shares by August 30, 2024.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is almost over, with only Dell Technologies (DELL) scheduled to report its FQ1 2025 earnings after hours on Thursday.

❖ The ex-dividend dates for Crane NXT (CXT), Cboe Global Markets (CBOE), Dover (DOV), ITT (ITT), McKesson (MCK), and Cigna (CI) are coming in the next several days.



New Buy: Adobe, Inc. (ADBE)

Adobe Inc. is an American multinational software company headquartered in San Jose, California. The company, incorporated in 1982, has historically specialized in software for the creation and publication of various types of content, including graphics, photography, animation, documents, and many more. Adobe is widely known around the globe for its flagship products, such as Photoshop, Illustrator, Dreamweaver, Acrobat Reader, PDF document format, and Flash multimedia platform, among others. Adobe is widely known around the globe for its flagship products, such as Photoshop, Illustrator, Dreamweaver, Acrobat Reader, PDF document format, and Flash multimedia platform, among others. In recent years, the company has expanded into a subscription software-as-a-service (SaaS) niche with its Adobe Creative Cloud product suite, as well as into the digital marketing software area.


360º Digital Experience

Adobe operates through three segments: Digital Media, Digital Experience, and Publishing and Advertising. The publishing and Advertising segment offers various legacy products and solutions for document management, e-learning, and web application development, as well as the new Advertising Cloud offerings.

Digital Media, the company’s most prominent segment, responsible for about 73% of total annual revenue, offers services and solutions that enable content creation, publication, and promotion. The Creative Cloud platform, which contributes the bulk of Adobe’s overall income, integrates time-stamped champions like Photoshop with its Firefly family of creative generative artificial intelligence (GenAI) models. Notably, Adobe’s Document Cloud – the backbone of the office with a document-management platform including Acrobat and other tools – also falls under Adobe’s Digital Media segment.

The Digital Experience segment, responsible for about 25% of revenue, provides a cloud platform that integrates a set of applications and services enabling customers to create, manage, measure, monetize, and optimize customer experiences ranging from analytics to commerce. Adobe’s Experience Cloud is – a comprehensive customer acquisition, experience, and retention product portfolio – has been strongly enhanced by acquisitions and integrations with other software providers over the past few years, which led to strong growth in Adobe’s digital marketing revenues.


Creativity Champion

With its market capitalization of $213 billion, annual revenues of over $19.4 billion, and net income of more than $5.7 billion, Adobe is one of the largest and most profitable software firms in the world. It holds a share of more than 60% of the application development market and over 81% of the graphics software market worldwide. As the creator of the PDF format, Adobe is the undisputed leader in the digital document market, with about 95% market share in the PDF reader space.

Despite its market leadership, Adobe doesn’t rest on its laurels, striving to outpace the existing and potential competitors by updating and enhancing its offerings through the implementation of advanced technologies. The company has been implementing various AI features in its products for years, and with the rise of GenAI, it was among the first to integrate cutting-edge tech into its platforms.

The company offers a range of AI products including Firefly, Express, and GenStudio, and integrates its generative AI capabilities into existing applications such as Photoshop, Acrobat, and enterprise software. One of the recent additions to Adobe’s GenAI portfolio is Adobe Express, an AI-powered web and mobile app, which integrates creative, marketing, and document-management tools, allowing for the generation of end-to-end content lifecycle. The tool is gaining traction and is already being used by numerous small firms, as well as larger companies including IBM and Red Hat. ADBE also partners with industry leaders to boost content creation capabilities. For example, it has collaborated with Microsoft to introduce the Adobe Express extension for the software giant’s AI tool Copilot.

ADBE is well-positioned to ride the current megatrend of the “creative/gig economy”. In addition to enhancing its customers’ experience, GenAI integration is expected to considerably increase the size of Adobe Creative Cloud’s total addressable market by allowing the general public to create digital content with ease. According to research, the AI-supported content creation market is expected to grow at a CAGR of over 31% in the next decade.


Impeccable Finances, Stable Growth

Despite its numerous acquisitions and heavy investment in R&D, Adobe has very little debt overall, and its liabilities are dwarfed by its cash pile. Its profitability metrics, such as ROE, ROIC, and ROA, strongly surpass its peer averages. Its gross, EBITDA, operating, and net profit margins come in the top tier of its industry. The company also demonstrates an impressive track record of free cash flow generation, with the FCF coming in at around $7 billion at the end of each of the last three fiscal years.

With revenue growth at a CAGR of 17% over the past decade, Adobe’s success has been built on consistency rather than explosive jolts. Its earnings-per-share have grown at a CAGR of 35% over the same period. ADBE has never failed to beat analysts’ quarterly EPS estimates.

In the latest reported quarter, Q1 2024, Adobe has strongly beat revenue and EPS estimates. That takes into account the $1 billion Adobe paid to design software startup Figma as a termination fee after abandoning the plans for acquisition due to regulators’ competitive concerns. All reporting segments saw a double-digit year-on-year revenue growth during the quarter, with the total revenue reaching a new record and EPS surging by 17%.

While ADBE, along with all other GenAI implementors, is still figuring out an optimal path to the monetization of the technology, it is already meeting strong customer demand. According to the company, innovative tools such as the Firefly AI and the new Acrobat AI assistant will lead to a significant acceleration in its annualized recurring revenue (ARR) in the second half of the year. Despite some softness seen in the ongoing quarter, analysts expect Adobe’s full-year 2024 revenues to increase by 20% from 2023, while the EPS is slated to rise by about 22%.


Total Return in Focus

ADBE stock rose to an all-time high in February this year but has since given back about 25% as investors worried that the stock outran its AI-backed prospects. As the realization dawned that many of ADBE’s AI investments would only fully bear fruit further down the road, Adobe’s shares declined. The stock is now trading below its long-term average, and at par with the average for the U.S. Software industry. Compared to its large-cap profitable peers in the industry, Adobe comes at the bottom of the price range. In addition, based on future cash flows, the stock is about 15% undervalued.

Adobe is expected to post its Q2 results on June 13th, which could lead to some turbulence in the stock. However, the current ADBE risk-reward profile looks very attractive for long-term purchase, given the company’s consistent strong earnings growth slated to continue or even accelerate in the next few years. Analysts from leading Wall Street firms see an average upside of 30% for the stock in the next 12 months.

In addition to the expected stock price appreciation, ADBE shareholders are rewarded through the company’s aggressive share repurchase policies. Over the past decade, the company has reduced its share count (dilution-adjusted) by over 9%. During 2023, the company performed buybacks in the amount of $4.4 billion, adding another $2.4 billion of repurchases in the first two months of 2024.

In March, Adobe’s board approved a new stock repurchase program, granting the company authority to repurchase up to $25 billion in common stock through March 2028. Based on Adobe’s current market cap, this represents almost 12% of shares outstanding that are slated to be taken off the market. This program, along with the expected earnings growth, is expected to support ADBE’s share price.


Investing Takeaway

Adobe is an undisputed market leader with a high-margin business, delivering consistent revenue and earnings increases. Given its size, economic moat, and innovative drive expected to drive accelerated bottom-line growth, as well as its historical and projected share “cannibalization”, we view its current valuation as moderate, with the recent declines allowing for an attractive entry point for long-term investors. Considering these factors, we believe that ADBE can be a valuable addition to the Smart Investor portfolio.



New Sell: Elevance Health (ELV)

Elevance Health, Inc., previously known as Anthem, is the largest commercial insurance company in the United States. ELV offers a comprehensive suite of commercial, Medicare, and Medicaid plans through its affiliates and subsidiaries.

ELV boasts excellent financial health with zero net debt and an enviable cash position. The company has posted strong earnings growth, averaging 12% in the past five years. However, its share price appreciation far outpaced earnings growth over the same period, averaging 18%. Because Elevance Health is far from being classified as a growth company, this could mean that its stock has outrun its intrinsic value.

Despite the positive earnings surprise in Q1 and the optimistic guidance, the remainder of 2024 is expected to be a difficult period for ELV and for healthcare providers in general. The regulatory changes and pricing pressures from government-sponsored programs are slated to continue into the next year, while presidential elections introduce several policy unknowns. Meanwhile, company-specific issues, such as stagnating Medicare Advantage and declining Medicaid membership count, as well as rising operating and other costs, may depress margins going further.

We may revisit this financially robust healthcare giant in the future when the regulatory and macro picture clears up. However, we believe that at the moment it is appropriate to sell the stock and lock in gains.



Portfolio Stocks Under Review

❖ R. Berkley Corporation (WRB) is placed under review as several Wall Street firms, such as BMO Capital and Bank of America, have reduced their price targets on the stock over the past weeks.

❖ Flex (FLEX): This contract manufacturer remains under review due to the heavy insider selling of the company’s stock in the past weeks. Flex last revealed its results on May 1st, surpassing analysts’ revenue and EPS estimates for its FQ4 2024 and beating full-year EPS projections, but slightly missing on annual revenue. The company also announced a restructuring plan aimed at reducing its workforce and enhancing operational efficiency.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Our exclusive club’s ranks are welcoming a new member, which surged past the 30% threshold during the past week: Dell Technologies (DELL) with a 44.9% gain since purchase on March 27th.

The Winners Club now counts 13 stocks: SMCI, GE, AVGO, ANET, EME, TSM, AMAT, APH, ORCL, GD, DELL, ITT, and PH.

The runner-up to enter the list of Winners is now Howmet Aerospace (HWM) with a 29.5% gain since we purchased it on April 10th. Will it close this minute gap, or will Vertex Pharmaceuticals (VRTX) – the second runner-up with a 27.7% gain – outrun it to the finish line?



Smart Investor Portfolio

 Portfolio Return YTD
Portfolio Volatility (Beta) Portfolio Dividend Yield
19.88% 1.04 0.86%


New Portfolio Additions

Ticker Date Added Current Price
ADBE May 29, 24 $478.43

New Portfolio Deletions

Ticker Date Added Current Price % Change
ELV Mar 6, 24 $519.19 +4.18%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $874.72 +242.49%
GE Jul 27, 22 $168.56 +201.65%
AVGO Mar 22, 23 $1412.45 +123.87%
ANET Jun 21, 23 $307.49 +102.95%
EME Nov 1, 23 $393.68 +90.76%
TSM Aug 23, 23 $159.41 +69.96%
AMAT May 31, 23 $221.32 +66.03%
ORCL Dec 21, 22 $124.49 +52.75%
APH Aug 9, 23 $133.98 +51.49%
GD Dec 22, 21 $297.34 +45.93%
DELL Mar 27, 24 $166.08 +44.86%
ITT Oct 18, 23 $133.29 +39.56%
PH Oct 11, 23 $526.54 +32.36%
HWM Apr 10, 24 $85.28 +29.51%
VRTX Aug 2, 23 $446.88 +28.51%
CI Jul 12, 23 $333.21 +24.01%
STLA Sep 6, 23 $22.43 +23.51%
FLEX Feb 21, 24 $33.64 +21.31%
CXT Oct 25, 23 $61.66 +19.13%
AIT Dec 6, 23 $195.86 +18.89%
MCK Dec 13, 23 $549.26 +18.85%
CHKP Jul 19, 23 $149.71 +17.59%
TXT Nov 29, 23 $87.47 +13.73%
SNX Apr 3, 24 $129.86 +11.53%
REGN Feb 7, 24 $973.16 +3.77%
AIG May 1, 24 $77.36 +2.72%
DOV May 8, 24 $183.48 +0.91%
CBOE Apr 24, 24 $178.85 +0.02%
EMR May 22, 24 $112.05 -1.45%
PYPL Apr 17, 24 $62.17 -1.99%
V May 15, 24 $270.98 -2.43%
WRB Jan 31, 24 $78.57 -3.75%



What’s Next?

Our next commentary will come out on Wednesday, June 5thUntil then – we wish you a world of investment success!

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