AI

Adobe’s GenAI Embrace is a Delicate Dance Between Investor Hopes and Creative Doubts

Adobe ($ADBE) has held a decade-long monopoly on creative software — charging creatives $659 a year for its Creative Cloud subscription. But now, analysts think Adobe has finally met their match with GenAI, which could soon see the masses swapping their Photoshop subscriptions for AI tools. Could this really wash away one of the creative industry’s most powerful names? After Adobe’s stellar earnings report, it seems unlikely.

Fighting fire with Firefly: If you want something done right, you gotta do it yourself — or at least with a bit of help from AI. And Adobe is betting that industry creatives will agree. Last year, it launched its own design AI model, Firefly, which is now integrated into Photoshop and Illustrator. This move aims to reassure users that Adobe remains at the cutting edge and attracts new clients.

• Last Friday, $ADBE jumped 14% — its highest single-day gain in four years — after posting record earnings, with sales rising 10% thanks to strong demand for new AI features.

• The company added $460M in net new annual recurring revenue, with Adobe CFO Dan Durn expecting an “acceleration” in new creative business throughout the year.

Good Artists Borrow, Great Artists Steal (Adobe’s Version)

Adobe’s AI integration could shield it from competitors. However, AI is becoming increasingly controversial among creatives, and backlash could pose a significant threat. Recently, Adobe upset clients by adding a clause to its terms and conditions allowing it to “access [user] content through both automated and manual methods, such as for content review.”

• Adobe had to clarify in a blog post that Firefly is not (and will not be) trained on consumer content.

• Internally, some Adobe employees expressed concerns — with one stating, “The general perception is: Adobe is an evil company that will do whatever it takes to F its users.”

Art or science? Investing involves numbers, and Adobe’s forward price-to-earnings ratio of 24x is now below its historical average, following a 9% drop this year. Analysts predict the company will continue to boost its sales by at least double digits in the coming years, with free cash flow growing even faster. However, hitting these numbers might be more art than science — as Adobe tries to convince customers that the extra cost for AI features will deliver value.

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LARGECAP RECAP

👀 Connected TV Advertising Prices Are Falling Thanks To A Deluge of Streaming Services

What makes more money: a premium plan or an ad-supported plan? Netflix ($NFLX) says ads, but that was before Amazon ($AMZN) came into the frame. Over the last few years, video streaming platforms Hulu ($DIS) and Netflix have embraced connected TV advertising (CTV) — unlocking a lucrative revenue stream while offering consumers a more affordable way to watch their favorite shows. However, one new entry is reducing prices in the CTV market — and jeopardizing the entertainment business’s cash cow.

• In January, Amazon announced it would enter CTV, adding ads to Prime Video in an effort to expand its fast-growing advertising business with affordable costs (CPMs).

• Since then, Prime’s lower costs and large advertising inventory have “upended” the CTV business, “driving down ad prices for everyone.”

Brought to you by Amazon: Other streaming services have reduced pricing to compete with Prime’s $30 CPM. Dramatically, Netflix’s ad rates are down 23.8% year-over-year. This could lead to price hikes for ad-free customers, but the rapidly expanding CTV market might help streamers avoid that outcome. According to eMarketer, CTV spending will push $30B this year and is expected to grow at a 20%+ rate for the next few years. This means there should still be plenty of money to be made on the internet’s most valuable new stream of real estate.

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Markets & Economy

Federal judge signals rejection of Visa ($V), Mastercard ($MA) fee settlement: The ruling is expected to pressure the payment giants to offer more favorable terms to merchants. [Read]

Slow start to hurricane season is likely deceptive: Atlantic hurricane season is here. Despite the slowest start in a decade, history shows a quiet early June doesn’t predict overall activity — concerning factors lie ahead. [Read]

Chinese solar powerhouses eclipse Big Oil: Seven Chinese companies now hold a more significant position in the energy landscape than the seven largest oil corporations in the previous century. [Read]

Business & Wealth

Telehealth CEO arrested for Adderall loophole: Federal authorities claim the company exploited relaxed pandemic regulations by prescribing Adderall without proper medical justification, reaping substantial profits. [Read]

Mastercard has a new smell: The company’s “multisensory branding” campaign stimulates all five senses. Mastercard plans to transcend conventional advertising using symbolic colors, custom fragrances, unique flavors, sonic branding, and textured cards. [Read]

Medicare to redo insurer quality ratings: After court challenges, the government will recalculate all 2024 ratings for private Medicare Advantage plans. Insurers may see hundreds of millions in bonus payouts. [Read]

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DIGIT OF THE DAY

Cava Is Worth $33M Per Restaurant, But Is Their Fast Growth Frying Their Future?

From the kitchen to the trading floor, Cava ($CAVA) has left customers and investors hungry for more. Dubbed the “Mediterranean Chipotle,” the fast-casual restaurant brand has outperformed recent IPOs, including hot AI firms and biotech startups. Since its IPO in June 2023, Cava’s shares have exploded over 300%, pushing its market value above $10B.

• With 323 restaurants, Cava’s per-restaurant valuation stands at $33M — far surpassing its closest rival, Chipotle ($CMG), valued at about $3M per restaurant at a similar stage.

• Despite this, analysts like JPMorgan Chase’s John Ivankoe and Piper Sandler’s Brian Mullan have downgraded Cava’s stock due to its high per-restaurant valuation and revenue.

Is Cava cooked? Upright Analytics CEO Lauren Balik is shorting $CAVA over concerns about its quality assurance practices. She highlights the risk of E. coli contamination in Cava’s ground lamb meatballs, which are often undercooked — a problem frequently mentioned in customer reviews. Although Cava opened 50 new locations last year without any major incidents, Balik believes the restaurant’s expansion into catering and presence near college campuses could lead to operational hiccups.

Read: Salad-Making Robots Have Powered Sweetgreen’s Stock To Triple-Digit Gains. Next On The Menu: More Robots.