Creative Adobe (ADBE) Roars Towards Lodestar Despite Wall Street Doubters

Business Insider

5 days ago

Adobe (ADBE) has had a rough run, both this year and over the past twelve months. Nearly $50 billion in market value has gone up in smoke since January amid uncertainty over whether AI could dismantle the once-solid moats in the creative software space, compounded by the company's conservative annual outlook for top-line growth. However, not all is doom and gloom.
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In tech, the market rarely rewards transitions from high-growth darlings to steady, defensive incumbents in the short to mid-term—and that seems to be exactly what's going on with Adobe. The silver lining is that profitability and fundamentals remain rock-solid, still generating meaningful shareholder value even with more modest revenue growth. The prolonged selloff has also left valuations significantly de-risked, creating a solid lineup of opportunities for long-term, value-oriented investors, with shares now trading well below sector averages.
Against the S&P 500 (SPX), ADBE has underperformed, especially since April, according to chart data. However, all is not lost.
That said, structural challenges are real and will need to be addressed if Adobe wants to fully regain market confidence as AI adoption accelerates.
Still, the company is operationally holding up well against these headwinds—continuing to post strong results—and at some point, that should translate into alpha generation. At current prices, where a large portion (if not all) of those structural risks are arguably already priced in, the stock looks like a solid Buy for patient, long-term investors.
Is Adobe's Moat Under Threat?
Adobe's once-solid creative software empire is starting to show signs of strain. For fiscal 2025, management is guiding for single-digit revenue growth —a pace the company hasn't seen since 2014. Back then, the slowdown was tied to the growing pains of shifting from boxed software to a subscription model. This time, the challenges are far more structural and directly linked to the biggest theme shaping the tech sector today: AI.
Operationally, Adobe's numbers still look strong. Since Q1 2023, the company has consistently beaten both top and bottom-line estimates, repeatedly raised guidance, and trimmed its share count by about 5% over the past year through buybacks. Earnings estimates for the next two years have actually trended higher over the last six months. Yet, despite this, ADBE shares are down more than 23% year-to-date and over 37% in the past twelve months.
The disconnect between solid operations and weak share performance comes down to the market's growing belief that competitive threats in creative software are very real. Giants like Meta Platforms (META), Alphabet (GOOGL), and others such as Canva and Figma (FIG) are arming advertisers and creators with AI tools that let them produce high-quality images, videos, and marketing materials—without needing complex programs like Photoshop. That strikes directly at one of Adobe's most enduring advantages: being the go-to toolkit for professional-grade creative work.
Why Adobe Is Seen as Lagging in the AI Race
What's added extra weight to the bearish case is the market's perception that Adobe has been slow to roll out truly compelling AI capabilities in its own suite. While features like Firefly and Sensei were designed to address this, it's tough to compete with rivals who embed content creation directly into their platforms—where users are already spending their time and money.
The main risk is that customers who once relied on Adobe's ecosystem will start to see these built-in AI tools as 'good enough,' especially for commercial and marketing purposes, and will partially (or even fully) replace the need for Adobe's products.
Over the past few years, market reaction has drawn a pretty clear line between the winners and losers in the AI race. The prospect of Adobe growing at only a single-digit rate in 2025—right as the tech sector experiences its biggest disruption since the dawn of the internet—feels underwhelming and puts the company in the 'loser' camp for now.
It's the same reason tech players that have prioritized buybacks over heavy investment in AI infrastructure have underperformed so far—Apple (AAPL) being the most notable example among the Magnificent 7.
Why Adobe's Defensive Shift Doesn't Mean It's Done Growing
Even though Adobe is seemingly losing the AI race, it's important to highlight that despite the shift from high-growth innovator to defensive incumbent, there's still significant value to be created for Adobe shareholders.
To start, Adobe's overall business remains extremely healthy—even if it grows at a high single-digit rate—thanks to its very high profitability. Over the past twelve months, the company has reported operating margins of 36%, driven by its recurring software revenue model.
If we take a forward growth estimate of roughly 9%—which aligns with analysts' expectations over the next three years—and maintain operating margins around current levels (historically about 35% over the last five years), Adobe would deliver a Rule of 40 score of about 45%.
This metric is a common benchmark for SaaS companies, indicating that when the sum of revenue growth and operating margin exceeds 40%, the business strikes a rare and healthy balance between expanding sales and profitability.
Put simply, this places Adobe among the 'cash-generating machines' in the software sector, with predictable free cash flow and plenty of room to reinvest or return capital through share buybacks.
Finally, trading at 16.5x earnings on a trailing twelve months (ttm) basis—22% below the industry average and nearly 50% below its own five-year historical average—Adobe's valuation looks fairly de-risked.
In fact, it appears significantly undervalued given its operational resilience. This is a company that, even in tougher environments, consistently delivers strong cash generation—a point often overlooked when the market is caught up in bull-run euphoria, as it is today.
Is Adobe Stock a Buy, Sell, or Hold?
Wall Street sentiment on Adobe is mostly bullish. Out of 29 analysts covering the stock in the past three months, 20 are bullish, six are neutral, and just three are bearish. ADBE's average stock price target stands at $478.35, implying an upside potential of about 42% over the coming year. Bear in mind that price targets can fluctuate from week to week.
Value Anchored in Adobe's Defense
The odds are stacked against Adobe in the short to medium term, as the market has lumped it in with the AI 'losers,' even though operationally the business remains solid and highly profitable.
Even if Adobe's investment narrative shifts to that of a defensive incumbent, its strong financial foundation and recurring revenue model provide a powerful buffer against market shocks. More than that, this resilience lets Adobe weather competitive pressures, like the current wave of AI creative tools from Big Tech, without hurting its ability to monetize or deliver long-term returns to investors.
When companies with this kind of durability trade at a significant discount, I believe the opportunity to go long is clear. Despite the unfavorable momentum, the upside asymmetry will eventually shine through.