Last Update 04 Feb 26
Fair value Decreased 0.44%ADBE: AI Transition And Semrush Deal Will Reshape Future Cash Flows
Analysts have trimmed their fair value estimate for Adobe slightly, to about $576 per share. They cite a wave of recent downgrades and reduced price targets that reflect concerns about limited near term upside, competitive pressure in creative tools, and uncertainty over how much the current AI transition will benefit the business.
Analyst Commentary
Recent research on Adobe reflects a clear cooling in sentiment, with several firms moving to more cautious ratings, trimming price targets, or flagging near term execution and competitive risks. The common threads are concerns about limited upside in the current AI transition, intensifying competition in creative tools, and questions around how durable Adobe's competitive position will be if lower priced or free alternatives gain traction, particularly with students, freelancers, and smaller businesses.
Some analysts point to decelerating growth in the Digital Media business and see that trend extending into FY25. They interpret this as a sign that AI driven features have not yet meaningfully changed the growth profile. Others highlight what they view as an undemanding valuation but still do not see clear catalysts that could shift sentiment in the short term, especially given guidance for operating margins in FY26 that they see as uninspiring.
Concerns also extend to Adobe's exposure at the higher end of the market. Goldman Sachs, for example, has argued that high end seat counts are under pressure as value accrues to lower tier offerings where Adobe has less presence. Combined with a tougher operating backdrop during the AI transition and what some see as inconsistent execution around product cycles, several research houses expect sentiment to stay cautious and share performance to remain constrained until there is more evidence of reaccelerating growth or renewed product momentum.
For you as an investor, this cluster of downgrades and target cuts is useful context. It signals that expectations embedded in the stock have come down, that the market is paying close attention to AI monetisation and competitive dynamics in creative tools, and that upcoming earnings reports and product updates are likely to be key checkpoints for whether these concerns ease or build.
Bullish Takeaways
- Even within cautious research, some bullish analysts still describe Adobe as a cheap stock. They suggest that the current valuation is already pricing in many of the near term concerns.
- Bullish analysts highlight what they view as good medium term opportunities tied to AI and Digital Media. They argue that, if execution improves, those drivers could support stronger growth over time.
- Several reports frame sentiment, rather than fundamentals alone, as a major headwind. This implies that clearer product execution or more consistent guidance could be enough to shift the tone back in Adobe's favour.
- Where price targets have been lowered instead of ratings cut outright, bullish analysts often position this as a reset of expectations rather than a loss of confidence in Adobe's long term earnings power. This can matter for how the market interprets future results.
What's in the News
- Reports indicate Adobe is close to acquiring Semrush for about US$1.9b, or US$12 per share, compared with Semrush's recent US$6.76 close, with talks still subject to potential negotiation changes (WSJ).
- A recent report links advancements in AI tools to pressure on software and data stocks, with Adobe grouped among names affected by this theme (WSJ).
- Adobe and Cognizant expanded their collaboration to help large enterprises use generative AI to manage growing content demand, brand governance and cost pressure, combining Adobe's AI powered platforms with Cognizant's services.
- Adobe announced a multi year partnership with Runway, making Runway's Gen 4.5 video model available for a limited time in Adobe Firefly and giving Adobe customers early access to future Runway models inside Adobe workflows.
- Adobe launched Photoshop, Adobe Express and Adobe Acrobat for ChatGPT, bringing editing, design and PDF tools into ChatGPT so users can create and modify images, marketing assets and documents directly in chat and then move into full Adobe apps when needed.
Valuation Changes
- Fair Value: Trimmed slightly from about $578.38 per share to about $575.83 per share, reflecting a modest reduction in the central value estimate.
- Discount Rate: Adjusted marginally from 8.58% to about 8.58%, implying almost no change in the required return used in the model.
- Revenue Growth: The assumed long term revenue growth rate was nudged up from about 10.89% to about 11.00%, a small increase in top line expectations.
- Net Profit Margin: Tweaked slightly from about 31.03% to about 31.03%, indicating a very small change in long run profitability assumptions.
- Future P/E: The future P/E multiple moved modestly from about 26.94x to about 26.75x, a minor reset in how much investors are assumed to be willing to pay for earnings.
Key Takeaways
- Adobe's AI investments and new products, such as Acrobat AI Assistant, are set to double AI-related business by 2025, boosting growth.
- Expansion in emerging markets and strategic partnerships are anticipated to drive revenue growth and improve margins through increased adoption and comprehensive solutions.
- Adobe faces challenges in AI competition, market expansion, and economic uncertainty, which could affect revenue growth and necessitate tangible outcomes from AI investments.
Catalysts
About Adobe- Operates as a technology company worldwide.
- Adobe's investment in AI capabilities and the introduction of new standalone products such as Acrobat AI Assistant and Firefly Services are expected to drive significant revenue growth. The company projects its AI-related book of business to double by the end of the fiscal year 2025, influencing both the Digital Media and Digital Experience segments.
- Emerging markets and expanding web and mobile offerings are contributing to Adobe's growth, with Creative Cloud's adoption showing strong momentum. This diversification is anticipated to bolster revenue and improve net margins as Adobe taps into a growing user base and increases price points in new regions.
- The integration of GenStudio, Firefly App, and Adobe's Experience Platform into marketing workflows and campaigns is expected to enhance personalization capabilities. This integration should drive increased adoption among enterprise clients, boosting subscription revenues and contributing to long-term profit expansion due to efficiencies gained through software synergies.
- Strategic partnerships and the development of custom models for large enterprise clients offer a pathway for Adobe to strengthen its enterprise offerings. The focus on providing comprehensive solutions for the content supply chain is expected to drive higher subscription revenues and improved customer retention rates.
- Adobe's strategy of increasing operational scale through enhanced direct sales efforts and an expanded ecosystem of partners aims to capture business, education, and government segments more effectively. This effort is likely to drive revenue growth by increasing sales capacity and broadening Adobe's reach into new markets.
Adobe Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- This narrative explores a more optimistic perspective on Adobe compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
- The bullish analysts are assuming Adobe's revenue will grow by 11.3% annually over the next 3 years.
- The bullish analysts assume that profit margins will increase from 30.4% today to 36.5% in 3 years time.
- The bullish analysts expect earnings to reach $11.4 billion (and earnings per share of $26.87) by about September 2028, up from $6.9 billion today. The analysts are largely in agreement about this estimate.
- In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.8x on those 2028 earnings, up from 21.9x today. This future PE is lower than the current PE for the US Software industry at 36.2x.
- Analysts expect the number of shares outstanding to decline by 3.63% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.
Adobe Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- The competitive landscape for AI models in the creative space is intensifying, which could impact Adobe's ability to maintain market share and drive revenue growth if competitors introduce superior or more cost-effective solutions.
- Adobe's strategy to integrate and monetize AI across all products relies heavily on continued innovation and commercial safety, but any misstep could slow their adoption and affect earnings growth.
- The macroeconomic environment remains uncertain, which could influence Adobe’s ability to drive consistent revenue growth across its diverse product lines, especially if partners and customers reduce spending on creative and marketing software.
- While Adobe's push into web and mobile offerings is designed to capture new user bases, execution risks associated with this expansion could impact future revenue if they fail to attract or convert new users effectively.
- The company's significant investments in AI and cloud integration must result in tangible revenue increases to justify the spending, or profit margins and overall financial performance could be adversely impacted.
Valuation
How have all the factors above been brought together to estimate a fair value?- The assumed bullish price target for Adobe is $605.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Adobe's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
- However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $605.0, and the most bearish reporting a price target of just $280.0.
- In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $31.2 billion, earnings will come to $11.4 billion, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 8.5%.
- Given the current share price of $354.06, the bullish analyst price target of $605.0 is 41.5% higher.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
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Disclaimer
AnalystHighTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystHighTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystHighTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
