MBI Daily Dose (July 11, 2025)
Companies or topics mentioned in today's Daily Dose: Correction to yesterday's daily dose, Adobe's headwinds, Floor & Decor
*Correction: Yesterday I mentioned "CMA reported Google’s real revenue (so not nominal) increased by 130-140% during 2015 to 2024 period, which at mid-point implies only 3.4% CAGR during the period.”
I apologize for the stupid mistake as the correct revenue growth CAGR was ~10%, not ~3.4% (I entered the wrong numbers in excel).
This means one of my takeaways was incorrect. Yesterday I said UK nominal search revenue growth CAGR (~5-6%) materially lagged overall search revenue CAGR (~12%) it may be challenging to extrapolate too much from UK numbers. However, now that we know real revenue growth was 10% and nominal growth likely was similar to overall company’s search revenue growth, it means CMA’s report may be much more applicable to the overall business than I implied yesterday.
It also means that while commercial query growth was below 3% during 2015 to 2024, revenue growth was still growing low double digit CAGR primarily through higher conversion and click-through rates. AI may continue to help in this instance, but as I said yesterday, commercial queries today seem plenty optimized already, so it’s just hard to be very confident about Google’s ability to continue to grow search revenue at HSD-LDD rate if commercial query grows at LSD rate. Of course, commercial query grew at LSD rate when there wasn’t ChatGPT around, so even replicating such LSD query growth going forward might prove to be challenging.
I watched this Kalshi commercial which was entirely created by AI tools (I recommend reading the entire thread), and it only reaffirmed my concern that these tools are likely a permanent headwind for Adobe’s creative cloud business. When brands can swap a full Creative Cloud production pipeline for a chat window and a text-to-video model, it’s hard to imagine how Photoshop, Illustrator, and Premier Pro can maintain their relevance for Creative Cloud customers in 10 years. If you are trying to learn editing or design skills today, are you spending time with Adobe’s software or Figma, Runway, Veo3, and numerous other AI tools?
These AI tools will likely only make it easier to create digital content, become cheaper, and more scalable as compute gets more abundant over time. Even if Adobe tries to develop their own models, it’s hard to imagine they can do a better job than SOTA model developers. Perhaps one way Adobe can still win is if the SOTA models are deemed to infringe copyright content, but the courts have so far sided (see here, and here) with the model developers.
I have received questions on Adobe every once in a while, especially since I owned the stock in the past. However, it has decidedly moved to my too-hard-pile the more I have observed and studied the AI tools.
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Floor & Decor (FND) is probably in every compounder bro’s watchlist (including yours truly) if they don’t own it already. However, their operating performance in the last few years has been less than inspiring to pull the trigger despite the stock being down ~38% from its peak in October 2021.
While there are macro factors that are weighing FND’s performance, it is Home Depot’s (HD) operating performance that makes FND look a bit mediocre. If you compare 2024 sales on a per store basis vs 2019’s (so pre-Covid), average flooring sales in HD, LOW, and FND increased by 13%, 8%, and 2% respectively.
Another way to look at it is while HD’s flooring sales per store only declined by 8% from its peak in 2021, FND’s sales per store declined by 19% from 2021.
FND is a good business, but it may be a good time for them to reassess whether it is more important to increase productivity in existing stores instead of continuing to add more stores.
Alex Morris from TSOH had some more thoughts on some of the macro factors that are weighing on FND:
Starting with existing home sales, which CFO Bryan Langley has called “our highest correlated metric”, the picture remains dire: the latest data from the National Association of Realtors (NAR) showed a subdued level of seasonally adjusted unit sales at ~4.0 million in May 2025; as you can see below, that is ~25% lower than the level typically reported pre-pandemic. Langley framed the historical context of these figures on the Q1 FY25 call: “In March 2025, existing home sales fell to a seasonally adjusted annual rate of 4.02 million, the lowest reading for the month of March since 2009 (down 2.4% YoY).”
…I struggle to understand what would drive the sizable improvement required to get back in-line with long-term trends. (J.P. Morgan U.S. Real Estate research: “What we've always looked at is the long-run, historical turnover of housing… How often do people move? We've looked at that over decades, and if we take that rate and apply it to the existing stock of owner-occupied homes in the United States right now, it would suggest that we should be running at about 5.8 million existing home sales.”)
While new homeowners / existing home sales is a key driver for FND, the company is also dependent upon current homeowners – today, the people who have built up meaningful home equity due to rising prices, with ~55% of homes tied to a mortgage at a sub-4% rate (as noted at Home Depot’s 2022 Investor Day, ~40% of owner-occupied homes don’t have a mortgage)
Current Portfolio:
Please note that these are NOT my recommendation to buy/sell these securities, but just disclosure from my end so that you can assess potential biases that I may have because of my own personal portfolio holdings. Always consider my write-up my personal investing journal and never forget my objectives, risk tolerance, and constraints may have no resemblance to yours.