By ODDO BHF AM
In this new monthly Fund Insight, we want to discuss the importance of innovation in technology companies. In particular, through the analysis of two case studies, we want to show how much the lack of innovation costs shareholders in technology companies that had reached the status of leader in their field.
The Adobe case: “if you can’t beat them, buy them”
Over the years, Adobe has built a leadership position in some of the fastest growing segments of the software industry: design solutions for creatives and the most popular marketing automation software suite on the market. This success has been built over a decade through organic growth, but also through a few relevant acquisitions that have complemented its software suite (Marketo in 2018 was one of the most structuring). Therefore, it is legitimate to consider that during 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) and from a marketing and commercial point of view (by being one of the first American software companies to succeed in its complete conversion to SaaS: Software AG as a Service).
And yet, Adobe 's remarkable innovation machine surreptitiously seized up at the beginning of the 2020s without it being possible to identify the exact causes. The first symptoms of this innovation crisis took the form of: a) a series of quarterly publications that missed the expectations of financial analysts; b) the emergence of more innovative and therefore disruptive competitors on parts of Adobe 's offer (Canva on the entry-level part of the graphic content creation market, but above all Figma in collaborative web and mobile design solutions). The climax of this innovation crisis was reached on 15th September 2022 when Adobe announced the acquisition of its competitor Figma for USD 20 billion (i.e. a stratospheric multiple of 50X the target's recurring sales) to extinguish this competitive threat and develop that part of the market that the leader Adobe could not develop organically fast enough. In this case, the innovation gap cost Adobe 's shareholders $20 billion (which should never have been spent if the company had continued to innovate at a sufficient rate) but it actually cost more than that if you take into account the destruction of stock market value attributable to all of Adobe 's disappointing quarterly financial releases prior to this acquisition. Adobe 's stock was down over 47% year-to-date at the time of writing.
The Intel case : Beaten by competitor AMD's product cycle
Intel 's leadership in the CPU (Central Processing Unit, the real brain of the computer) has been built up over several decades. It has a 74% market share in the PC CPU segment and an 85% market share in the server CPU segment, both for the year 2021 according to estimates by BofA and Mercury Research.
And yet Intel 's recent history is one of very significant destruction of its stock market value (-46% over the past year (YTD) at the time of writing), the result of a significant erosion of its profits, the causes of which are to be found in losses of market share to its main competitor AMD. According to the same sources, Intel 's market share in PC CPUs should erode by 20 points (from 83% to 63%) between 2019 and 2026 and its market share in server CPUs by 31 points over the same period (from 96% to 65%).
How to explain such a collapse of the leader's position? Intel is undoubtedly innovating. Its product cycle in the PC CPU (Alder Lake in 2021, Raptor Lake in 2022, Meteor Lake in 2023 and Arrow Lake in 2024) as well as that in the CPU Server (Ice Lake in 2021, Sapphire Rapids in 2022, Emerald Rapids in 2023, Granite Rapids and Sierra Forest in 2024) show this.
So where do Intel 's problems really come from: 1) Its main competitor AMD innovates faster and better than it (with the Ryzen and EPYC product cycles for the PC chip and the Server chip respectively) ; 2) a 3rd player is also gaining market shares on Intel , that is ARM, an English company ; 3) Intel has not always been able to develop and produce its innovations to such an extent that, for example, it has failed to manufacture its product line around the 7 nanometer geometry ; 4) Intel didn't catch the chiplet wave fast enough (or at least not as fast as AMD), i.e. the stacking and gluing of transistors on a chip (rather than the classic juxtaposition) in response to the end of Moore's law (which nevertheless bears the name of Gordon Moore, founder of Intel , a great paradox of history). All this, of course, in a context where Intel 's customers have well welcomed the end of the monopoly and the possibility of true dual sourcing in the CPU market.
