Artificial intelligence has been a central investment theme this year, drawing investors to companies that have plans to leverage AI to create or enhance their products and services.

Adobe (ADBE:NASDAQ), the digital design software firm, has been a prime beneficiary of this trend. It shares are up 58% year-to-date, helped by the launch of its new generative AI feature called Firefly.

Adobe’s impressive stock performance isn’t simply based on hype, the company has been putting up impressive organic growth too, as evidenced by record-breaking revenue in the third quarter at $4.89 billion, compared to $4.43 billion a year earlier. Adjusted earnings were $4.09 per share versus $3.40 last year.

Adobe has more than 50% of the digital content creation software market and this means that whenever you view an image, video, website, magazine, or even an app, there is a good chance it was created using its software.

‘We believe Adobe will be a major beneficiary of continued explosive growth in this market, as ever-richer digital content is consumed across devices and as Adobe Firefly generative AI unleashes creativity,’ says Blue Whale Growth Fund (BD6PG78).

Yet quality company investor Fundsmith Equity (B41YBW7) has a different view of the stock because of the planned acquisition of Figma. This is a direct competitor to Adobe in the design software space, and priced at $20 billion, it isn’t cheap. Adobe argues the deal will open up new revenue avenues with Figma’s better user interface bolted on to Adobe’s own creative tools.

Adobe has faced competition from startups like Figma, Lightricks and Canva. But if you paint yourself as best-in-class, shouldn’t you be beating your rivals, not buying them? Fundsmith manager Terry Smith, when complaining about capital allocation policy among companies in his latest letter to shareholders, name-checked Adobe.

Large M&A is always risky and there are investors who see it as the last roll of the dice when growth has slowed and other options exhausted.

Shares’ view is that each potential acquisition needs to be scrutinised on its own merits. Buying Figma could be a disaster for Adobe, but we’ll never know for sure unless it pushes the deal through and executes successful integration.

From one angle, it comes down to trust in the management. The top team is filled with industry experts and therefore well placed to make calls regarding best use of company resources to secure future growth, and Adobe’s leadership have proved to be excellent generators of shareholder value over the years.

If that is not your opinion, you should be looking to exit the stock and invest elsewhere.

DISCLAIMER: The author (Steven Frazer) owns units in Blue Whale and Fundsmith. Editor Daniel Coatsworth owns units in Fundsmith.

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