Adobe ADBE 0.00%↑ , is trading at roughly 13 times trailing earnings, the cheapest it’s been in about a decade. The stock sits at $255, for a market cap of around $99 billion.
The company now has over 1 billion monthly active users across its products. It keeps hitting record revenue and raising guidance, yet the stock keeps falling.
Why the Stock Is Down: AI Fears
Adobe is being punished because of AI. The fear is that AI will make software obsolete: if anyone can type a prompt into ChatGPT and get a finished image, why pay for Photoshop?
I think that fear is totally overblown, and the numbers so far back that up:
Revenue has grown 10% to 13% every quarter
Q3 revenue hit a record $6.7 billion
Management raised full-year guidance again
Adobe is also using AI as a growth driver of its own:
AI-first annual recurring revenue (ARR) is over $650 million and growing more than 150% a year
Firefly ARR grew 40% in a single quarter
Professionals Aren’t Switching
I think the market has badly overreacted to the idea that people will vibe code their own software and replace tools like Adobe Premiere. That’s not going to happen, and professionals aren’t switching.
A chatbot can make a decent social media graphic, but it can’t replace entire editing workflows built on professional software. Will AI bring more competition? Yes. But the average consumer isn’t going to vibe code anything, and Adobe’s brand recognition is too strong for users to trust these tools over it.
Enterprises also need safe AI. Big brands can’t risk copyright lawsuits over an AI-generated ad, and Firefly is trained on licensed content. That makes Adobe the safest choice for corporate legal teams.
The Business Model
Adobe’s business is split into two customer groups:
The smaller segment is growing faster, and it’s where Adobe is pushing hardest.
What I like most about this business:
About 97% of revenue is subscription-based and recurring
Gross margins are in the high 80s
Total ARR was $27.5 billion at the end of the quarter
That’s about as capital light and recurring as a business gets.
The Freemium Pivot
Adobe is in the middle of a big strategic shift, and it’s one of the main reasons the stock has been hit.
Adobe is deliberately giving away more for free to grow its user base, and it deferred planned Creative Cloud price increases. Management openly said this would hurt short-term ARR numbers.
The bet is that free users eventually convert, the same way free Reader users helped build Acrobat into a multibillion-dollar business on its own.
So far, user numbers are way up:
Creative freemium MAU crossed 100 million, up over 70%
Acrobat and Express MAU passed 900 million, up over 25%
But net new ARR has fallen roughly 36% to 37% year over year. Users are flooding in, but the revenue pipeline is growing more slowly for now. We’ve yet to see this part of the pivot really pay off.
Growth Opportunities
Freemium conversion: Even a small slice of those 900 million Acrobat and Express users converting to paid AI tiers could be meaningful.
Enterprise content production: Brands need far more content variations than human teams can produce, and Adobe’s AI offerings can bridge that gap.
Semrush: Adobe closed this $1.9 billion all-cash acquisition in April. Semrush helps brands track how they show up in AI chatbots and search. It may end up a relatively small line item, but it’s an interesting growth vector, and acquisitions like this are another way for Adobe to keep growing.
AI Partnerships
Rather than fighting AI chatbots, Adobe is putting its tools inside them:
OpenAI: In August, Adobe launched a ChatGPT plugin with 70+ tools across Photoshop, Premiere, Illustrator, and more.
Google Cloud: Gemini, Veo, and Imagen models are now built into Firefly, Photoshop, Express, and Premiere.
Runway: A multi-year deal makes Adobe Runway’s preferred API partner for video models.
Coming soon: Adobe says it’s bringing its tools to Claude, Copilot, Gemini, and Slack.
These aren’t direct revenue deals. They’re content funnel partnerships, where users have to register with Adobe to use the tools. Their value depends entirely on how well chatbot users convert.
Competition
Adobe competes with different companies in each market:
Thumbnail design and image generation: Canva
UI and product design: Figma
Image and video generation: OpenAI, Google, Midjourney, and others
Marketing software: Salesforce and Oracle
Documents and e-signatures: Microsoft and DocuSign
Despite the competition, I think Adobe has strong moats:
Switching costs: Professionals have spent years building muscle memory in these apps, and agencies and enterprises have entire workflows built around Adobe. Switching would be time-consuming and costly.
Brand: “Photoshop” is literally used as a verb.
Patents and IP: Adobe can license training data from its software, which AI models need. That’s an advantage for Firefly and its other AI products.
The professional side of the business is well protected. The casual creator market is much less so, and that’s where AI is doing most of the damage.
As a creator myself, I don’t feel the need to spend as much on Adobe. I can use Canva, generate some AI thumbnails, and I’m good to go. I can see that being true for a lot of people. But the company is still incredibly strong regardless.
Share Buybacks
Shares outstanding fell to 391 million as of August, down from 413 million at the end of 2025, a 5% reduction in about nine months
Adobe bought back 26 million shares for around $7 billion this year
The board authorized another $25 billion in buybacks running through 2030
Buying back stock while it’s cheap is exactly what I want to see.
Financials
Q3 results:
Revenue: around $6.7 billion, up 13%
Net income: $1.8 billion
GAAP EPS: $4.62
Margins:
Gross margin: 88.7%, down from 89%
Operating margin: around 35%
Net margin: 27%
Margins are slipping slightly, but they’re still incredibly strong. AI and inference costs could eat into them a bit more going forward.
Risks
Freemium conversion: Free users need to start converting to paid.
AI lowering the skill barrier: Some people who would have used Adobe will just generate images in ChatGPT instead. That’s pretty inevitable, though operating results are still very strong.
Broader AI disruption: How much AI ultimately disrupts Adobe’s products.
AI costs: How much it costs Adobe to run Firefly and its other AI products.
Final Thoughts
I’m a bit biased, since Adobe is in my portfolio and I’m a shareholder. But I think the company is firing on all cylinders.
Adobe is generating over $10 billion a year in free cash flow and trades at around 12 times forward earnings. That’s a very low multiple for a software company growing double digits with 35% operating margins.
I think the market has wildly overestimated how much AI will hurt software as an industry. There is some disruption, no doubt, but it’s relatively minor, and this company is printing cash.
So I personally think it’s a great time to be a buyer.
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