Fund Insight ODDO BHF Artificial Intelligence – October 2022
In this new monthly Fund Insight, we want to expand on the importance of innovation in technology companies. In particular, by analyzing two textbook cases, we want to show how much the lack of innovation costs shareholders in technology companies that have nevertheless reached the status of leader in their field.
The Adobe case: “If you can’t beat ’em, buy ’em”
Adobe has built a leadership position over the years in some of the fastest growing segments in the software industry: design solutions for creatives and the most popular marketing automation software suite in the industry. This success has been built for about a decade organically but also through several related acquisitions that have complemented its software suite (Marketo in 2018 is one of the most structuring). So it is legitimate to consider that in this decade, Adobe has innovated faster than its competitors both from a technological point of view (by providing the most popular digital solutions on the market) but also from in marketing and commercial perspective (by being a among the first American software companies to successfully convert to SaaS: Software as a Service).
However, Adobe’s impressive innovation machine took off stealthily at the beginning of the 2020s without really being able to determine the exact reasons. The first symptoms of this transformational crisis took the form of: a) a series of quarterly publications that did not capture the expectations of financial analysts; b) the emergence of more innovative and therefore disruptive competitors in parts of Adobe’s offer (Canva in the entry-level part of the graphic content creation market but especially Figma in web and mobile collaborative design solution ). The climax of this innovation crisis was reached on September 15, 2022 when Adobe announced the acquisition of its competitor Figma for 20 billion USD (ie a stratospheric multiple of 50X the target’s recurring sales) to kill this competitive threat and develop this part of the market that the leader Adobe cannot develop organically fast enough. In this case, the innovation deficit cost Adobe shareholders $20 billion (which shouldn’t have been spent if the company had continued to innovate at a sufficient rate) but it actually cost more than that considering the breakdown of market value attributable to all. Adobe’s disappointing quarterly financial publication prior to this acquisition. Adobe stock is down more than 47% year-to-date at the time of writing…
The Intel case: Hit by competitor AMD’s product cycle
Intel’s leadership in the CPU (Central Processing Unit, the real brain of the computer) has been built, for its part, over several decades. This is divided into a market share of 74% for CPU in the PC segment and a market share of 85% in CPU Servers; both for the year 2021 according to estimates by Bofa and Mercury Research.
However, the recent history of Intel is a massive deterioration of the stock market value (-46% for a year at the time of writing this note), which comes directly from a significant erosion of its profits. its causes can be found. losing market share to its main competitor AMD. So, according to the same sources, Intel’s market share in PC CPUs should decrease by 20 points (from 83% to 63%) between 2019 and 2026 and its market share in Server CPUs by 31 points in the same period (from 96% to 65%).
How to explain such a collapse of the leader’s position? Intel is undoubtedly changing. Its cycle is done on PC CPU (Alder Lake in 2021, Raptor Lake in 2022, Meteor Lake in 2023 and Arrow Lake in 2024) as in Server CPU (Ice Lake in 2021, Sapphire Rapids in 2022, Emerald Rapids in 2023, Granite Rapids and Sierra Forest in 2024) bear witness to this.
So where do Intel’s problems really come from: 1) Its main competitor AMD innovates faster and better than it (in the Ryzen and EPYC product cycles respectively for the PC chip and for server chip); 2) a 3rd player is also gaining market share with Intel, it is English ARM; 3) Intel has not always been able to create and produce its innovations at such a scale by failing, for example, to build its product line around 7-nanometer geometry, for example; 4) Intel did not get fast enough (or not as fast as AMD), the chiplet wave, that is, the stacking and sticking of transistors on a chip (instead of the classic juxtaposition) in response to the end of Moore’s law (which bears, however, the great irony of history, the name of Gordon Moore, founder of Intel). All this in a context of course where Intel customers have welcomed the end of the monopoly and the possibility of true dual sourcing in the CPU market.
Read the full article in PDF below.
Past performance is not a reliable indicator of future performance and is not consistent over time. None of the aforementioned companies constitute an investment recommendation.