Last Update 18 Feb 26
Fair value Increased 0.77%ADBE: AI Transition And Creative Ecosystem Partnerships Will Reshape Future Cash Flows
Our fair value estimate for Adobe has edged higher to $580.27 from $575.83 as analysts broadly reduce price targets and ratings in response to softer Digital Media growth expectations, questions about the durability of the competitive moat, and concerns that AI benefits may be slower to show up in revenue and margins than previously hoped.
Analyst Commentary
Recent Street research on Adobe has tilted more cautious, with several firms cutting ratings and price targets as they reassess Digital Media growth expectations, competition, and the timing of AI monetization. A number of reports flag slowing growth in FY25, rising questions about the moat in creative tools, and a tougher backdrop for higher priced software seats, particularly at the high end of the market.
Goldman Sachs assumed coverage with a Sell rating and a US$290 price target, citing pressure on high end seat count and a belief that more value is shifting toward lower priced offerings where Adobe has limited exposure. Other firms highlight increasing competitive intensity in segments such as smaller businesses, students, and freelancers, and suggest that limited near term catalysts could keep the shares trading within a range.
Some analysts argue that Adobe is contending with an AI related transition that is weighing on execution and investor sentiment. They point to decelerating top line growth expectations, inconsistent product cycle execution, and year over year operating margin guidance that they see as underwhelming for FY26. These factors are being cited as reasons for rating downgrades to more neutral stances, even where longer term opportunities are still acknowledged.
At the same time, a few research notes describe the stock as inexpensive relative to their own assessment of Adobe's medium term potential, even as they temper expectations for near term upside. This mix of subdued sentiment, lower targets, and valuation support helps explain why our fair value estimate has moved only modestly despite a cluster of downgrades on the Street.
Bullish Takeaways
- Bullish analysts describe Adobe as a cheap stock, indicating that, relative to their internal assumptions, the current share price does not fully reflect what they see as solid medium term opportunities in core Digital Media and AI related offerings.
- Some research points to AI as a positive tailwind for the broader software total addressable market over the long run, which, if realized, could support Adobe's growth ambitions and justify higher valuation multiples over time.
- Even in more cautious reports, there is recognition that Adobe retains meaningful medium term potential, with long duration product franchises and a sizeable creative ecosystem that could support execution and monetization opportunities beyond the current guidance window.
- A few firms acknowledge that investor interest in software is currently muted. They view this as a sentiment overhang rather than a structural issue, and suggest that stronger execution or clearer AI driven revenue contribution could improve the stock's appeal without requiring a fundamental reset of the business model.
What's in the News
- Media coverage highlights that recent advancements in AI tools have weighed on software and data stocks broadly, with Adobe mentioned in that context as investors reassess the role of AI across the sector (Wall Street Journal).
- Cognizant announced an expanded global collaboration with Adobe to help large enterprises use Adobe's AI powered creative and experience platforms. The collaboration aims to manage rising content demand, address brand and regulatory pressure, and integrate generative AI directly into creative workflows at scale.
- ITG said it will integrate Adobe Firefly generative AI into its Storyteq content marketing platform, pairing Firefly with ITG's Halo Intelligence to support content recommendations and streamline areas such as briefing, workflows, approvals and compliance.
- Adobe announced a multi year partnership with Runway that makes Adobe Firefly a preferred access point for Runway's generative video models. The partnership includes early access to Gen 4.5 inside Firefly and broader integration with tools such as Premiere and After Effects.
- Adobe launched Photoshop, Adobe Express and Acrobat for ChatGPT, bringing editing, design and PDF tools directly into ChatGPT so users can make conversational edits and then move work into full Adobe applications if they want more control.
Valuation Changes
- Fair Value: Our estimate has risen slightly to $580.27 from $575.83, reflecting a modest upward revision in the model inputs.
- Discount Rate: The assumed discount rate has edged down slightly to 8.56% from 8.58%, which modestly increases the present value of projected cash flows.
- Revenue Growth: The long term revenue growth assumption has shifted slightly higher to 11.11% from 11.00%, indicating a small adjustment to expected top line expansion.
- Net Profit Margin: The projected net profit margin is essentially unchanged at 31.01% compared with 31.03% previously, implying a stable long run profitability view.
- Future P/E: The future P/E input has moved marginally higher to 26.9x from 26.8x, signalling a slightly higher assumed earnings multiple in the outer years of the model.
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.
