March 31, 2024 Adobe (ADBE), known for its array of creative software like Photoshop, Premiere Pro, and Illustrator, is facing a potential threat from Canva, a major player in the creative software industry. Canva’s recently outlined its plans to acquire Affinity, a software company offering products similar to Adobe’s but at more affordable rates.

Adobe’s market dominance is attributable to its extensive professional user base and the high switching costs associated with its software. However, some competitors are edging through by offering budget-friendly or single-purchase software as an alternative to Adobe’s subscription model.

Canva, valued at $26 billion with revenues hitting $2 billion in 2023, targets customers who prefer a less complicated user interface for creating visual content. It provides overlap with Adobe through Adobe Express, but the complexity and capabilities of other Adobe products separate the two.

Affinity’s customer base of over three million purchased its software suite for a one-time fee of $114.99, in stark contrast to Adobe Creative Cloud’s monthly subscription fee of $59.99. Despite potential integration into Canva’s subscription plans, both companies affirm a continued offer of permanent licenses for Affinity.

With the acquisition of Affinity, Canva is positioned to serve various design needs at different stages, marking it as a legitimate contender for Adobe’s customer base. Canva’s user base of over 170 million, with a significant percentage from Fortune 500 companies, further strengthens its proposition as a consolidated solution.

Meanwhile, Adobe’s growth appears to be slowing despite attempts to augment its products with AI technology, as evidenced by a mere 9% forecasted growth for the second quarter of fiscal 2024 from an 11% increase in the first quarter.

Given Adobe stock’s high valuation — trading more than 11 times forward sales and 30 times forward adjusted earnings — Canva could significantly undercut Adobe on price if it chooses to offer subscription plans for Affinity’s software suite.

While Adobe may leverage its strong product foundation to resist this challenge from Canva, the latter’s growth and strategic moves present a significant threat to the erstwhile dominance of Adobe. As such, investors should watch for potential pressure on Adobe’s high margins and pricing.