r/valueinvesting
Adobe: Everyone hates it, which is starting to get interesting
Author's valuation model shows Adobe is significantly undervalued at ~$200, offering asymmetric upside with a blended target of ~$300.
- Probability-weighted intrinsic value is ~$298, with the base case ~40% above the current price, offering strong asymmetric upside.
- Trades at a steep discount to peers (~10x forward P/E) despite strong margins, $9B+ FCF, and a $25B buyback shrinking share count.
- Relative valuation and DCF models both converge around a blended target of ~$300, implying significant undervaluation at ~$200.
- Generative AI poses a disruption risk that could hollow out the core business, stall ARR growth, and erode pricing power.
I’m not going to rehash the qualitative discussion here. It’s already been discussed extensively in this sub, almost to the point of becoming spam.
If you’ve been following the conversations, the key points should be hard to miss. And if you somehow missed them, you may have been living under a rock.
So here's my back-of-hand valuation with assumed inputs --
Four scenarios
|Scenario|Rev growth path|Op margin|Terminal ROIC|WACC|Value/share|Prob|
|:-|:-|:-|:-|:-|:-|:-|
|Bear: AI hollows the core, ARR stalls, pricing erodes|6%→1%|→30%|14%|10.5%|\~$180|30%|
|Base: growth decelerates gracefully, margin holds \~36%|9%→4%|37%→35%|20%|9.5%|\~$305|35%|
|Moat: Firefly monetizes, integrated workflow defends pricing|11%→5%|38%|25%|9.2%|\~$370|25%|
|Bull: GenStudio/Firefly become enterprise content-supply-chain engines|13%→6%|40%|28%|9.0%|\~$440|10%|
Probability-weighted intrinsic value ≈ $298. The base case alone (\~$305) sits \~40% above the current price, and even the bear case (\~$180) is only \~10% below it. That is the asymmetry.
The market price of \~$200 is essentially giving almost no credit to the moat/bull tail.
On Relative Valuation Basis
Adobe trades at roughly 10x forward earnings -- a sticky (ik ik don't fight me over this now) subscription franchise with strong margins, $9+ billion FCF, and a $25 billion buyback shrinking the share count, versus workday at 11.76x NTM P/E and servicenow at 23.77x. On FY26 non-GAAP EPS guidance of $23.30 to $23.50: a disruption-discounted 12x → \~$281; a "fair-for-quality-but-cautious" 14.5x → \~$340. FCF lenses (14–18x FCF vs the historical mid-20s) cluster \~$345–440. Relative midpoint \~$310, reconciling tightly with the DCF.
Blended target (≈65% DCF / 35% relative): \~$300
If you ask why 65/35 weightage - I like nice round numbers
It’s dead, Jim.
May buy a leaps.
Great job
Huge customer base going nowhere. Huge revenue. Huge margins. Growing every year.
But yeah, you must be right.
That was a really solid forward-looking analysis of its AI strategy and related competitive threats.
Thank you.
It can’t possibly go lower…
I’m in the “Who cares” camp. The margin of safety is not clear.
I think you have to look at it from users perspective. I stopped using adobe for photo and video editing. There’s too many other alternatives that are lower cost.
But it's not like sales or profit are declining, they've done nothing but rise throughout the AI era.
You are right on the market cap. I was looking at their trailing peak market cap around 200B rather than the current price at 202. At 82B market cap, the math changes. A 8.5B net buyback is indeed a 10% annual share reduction. The question is whether they can sustain that run rate. The 10.5B buyback over the last 4 quarters was funded by drawing down cash and issuing debt. Their actual free cash flow was closer to 6.5B after adjusting for SBC and capitalized software. If they keep buying back 10B a year, they will have to leverage up, which is risky if Figma integration drag or AI price cuts squeeze the core operating margin. Do you think they can maintain this pace of buybacks once the cash balance is depleted?
They spent their recent second to last 25B authorization in 2 years.
Been watching it a while, really cant ignore it at $200. Adobe and Microsoft software are literally on every corporate computer... good luck getting IT departments to switch over to anything without enterprise level management and security tools
No margin of safety here especially when u take into account the fact that the base case is basically a near 100% chance
It's very logical. The fact that you don't see an edge is wild to me.
Your question is a trap. I don’t own any SaaS sh&@ Co’s.
But the motley fool recently likes vrsk, believing it’s business is more entrenched in insurance. Yell at them if disagree. I have no opinion on it.
“Dead money” relates to the stock price, not revenue.
The fact that this needs explaining says a lot about the weakness of your analysis / sophistication.
And investing is a sumation of the future, not the past…
Adobe is dead money.
“Grab a number and skip the why”.
I don’t want to. I like why.
Yes, and you can also have cash on-hand and invest in other things.
Adobe has the makings of a value trap. Good luck to those who like it here. No thanks.
Priced in is a guess about what everyone else concluded. If the bull case is priced in, tell me what the market sees that kills it. Point to the thing. "The crowd is probably right" is a reason to never look at anything, and it's the opposite of value investing, which pays when the crowd is wrong and you can say why.
Uh, no. The absence of doing something (not trading/not investing) is also a value-based. See Berkshire’s balance sheet.
I’m in the “Who cares about Adobe” camp.
A margin of safety on value on Adobe shares is not there in my view — (Seth Klarman) — which is not only a core tenant of value investing, it’s not the opposite…
is the percentage YoY growth?
They buyback a lot more than 5bn annually however. TTM the numbers are 10bn and that could increase going forward since semrush acquisition wont reduce FCF and their FCF increasing.
Adobe's TTM buyback was closer to 6B, but even at 10B, the yield is lower than the headline because the market cap is around 200B, not 100B. A 10B buyback minus 1.5B in stock based compensation leaves a net reduction of 8.5B. On a 200B market cap, that is a 4.25% net yield. It is a solid return of capital, but still far from a massive share count contraction. Also, the dilution from stock based compensation is a recurring headwind that eats into that yield every year.
Where are you getting 200B market cap from? Isn’t it 82B?
I took a big entry today at 199.6
Big companies already use Adobe, and Adobe provides copyright protections and legal indemnification for customers using certain AI tools. Because of that, I’m not too worried that AI image generators alone will disrupt the business.
Adobe is already deeply embedded in large organizations, and those companies care about compliance, workflow integration, and risk mitigation just as much as they care about generating images. That’s a very different market from consumers using a free AI image generator.
This is one of Michael Burry’s arguments. It’s a pretty good one. Haven’t pulled the trigger on buying shares yet.
Same 😆
I bought it so that it wouldn't go up
I've hated Adobe stock for a very long time. Like 10+ yrs.
There's still major difference between meta and adbe.
Meta was able to pivot to other strategies quickly while adbe is still mainly trying to find out what to do.
In hindsight
Ignore the noise and buy. Growth has not slowed and PE is just 12. https://i.imgur.com/szAzJTa.png