ADBE

Adobe sells, by subscription, the tools used to create documents and content: Acrobat, Photoshop, Illustrator, Premiere, plus the enterprise marketing layer. In fiscal 2025, subscriptions were $22.9B, or 96% of revenue. Operating margin 37%, gross margin steady at 88–89% for four years, return on invested capital around 40% against a cost of capital near 9%.

Customer stickiness does not come from software quality but from accumulation: decades of files, plug-ins, formats and expertise. A better tool still has to overcome the inertia of compatibility.

Here is the part we are not going to dress up. We judge this advantage narrow and narrowing. Generative AI attacks precisely what it rests on: if creating and editing happen from a prompt, proprietary formats and accumulated skill stop being barriers. Adobe's own 10-K concedes as much, describing markets that are "intensely competitive" with "limited barriers to entry." And management is signalling it: in August 2026 Adobe moved its AI tools to freemium and paused price increases, accepting slower near-term growth.

We hold the position because the price paid does not require this story to end well — only that it end slowly. It is a bet on the pace of erosion, not on its absence. If we are wrong somewhere, it is probably here.