Is There an Opportunity in Adobe After 32% Drop and AI Integration News?

Thinking about what to do with Adobe stock right now? You are definitely not alone. It is not always easy to navigate after such a dramatic shift in price performance, especially for a market leader that has long inspired confidence. Over the past year, Adobe’s stock price has dropped a steep 31.6%, and it is also down 21.4% so far this year. But despite these sharp declines, there is more to the story than meets the eye.

In the last five years, Adobe’s stock actually underperformed the broader market, declining by 31.0%. In the shorter term, recent market volatility has triggered additional caution from investors, with the stock returning -3.8% over the past week and just -0.5% over the past month. Some of the latest market developments, such as concerns over competition in digital creative tools and shifting sentiment around high-growth tech, have certainly played a role in these moves. Still, Adobe’s status as a foundational player in the creative and digital media industry continues to set it apart.

So where does value come into play? When we put Adobe under the microscope using six key valuation checks, it comes in with a value score of 5. This means the company appears undervalued in five different tests, a signal that could point to opportunity for investors seeing beyond short-term turbulence.

Next, we will break down these valuation approaches to see why Adobe’s score looks so strong compared to its headline numbers, and explore what might be an even better way to judge value by the end of this analysis.

Why Adobe is lagging behind its peers

Approach 1: Adobe Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's value by predicting its future cash flows and then discounting those amounts back to their present value. This approach helps investors assess what the business is fundamentally worth based on actual cash it can generate, rather than just market sentiment.

For Adobe, the DCF model uses a 2 Stage Free Cash Flow to Equity approach. Currently, Adobe has a trailing twelve-month free cash flow of $9.5 Billion. Analyst estimates project Adobe’s free cash flow growing gradually, reaching about $12.5 Billion by 2029. While analysts provide explicit estimates for the next five years, projections beyond that point are carefully extrapolated by Simply Wall St’s valuation team to account for long-term trends.

Taken together, these future cash flows generate an intrinsic value per share of $512.24. Compared to the company’s current market price, the model points to Adobe being 32.3% undervalued.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Adobe.

Our Discounted Cash Flow (DCF) analysis suggests Adobe is undervalued by 32.3%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Adobe Price vs Earnings

For profitable companies like Adobe, the Price-to-Earnings (PE) ratio is a widely accepted metric to gauge valuation. This ratio tells investors how much they are paying for each dollar of earnings, making it especially relevant for established businesses with solid profitability. Typically, higher growth expectations warrant a higher PE multiple, while greater risk or uncertain earnings growth puts downward pressure on what is considered a "fair" PE.

Looking at the numbers, Adobe is currently trading on a PE ratio of 20.86x. That is noticeably lower than both the industry average PE of 35.73x and the average among key peers, which is an even loftier 62.89x. While on the surface this could suggest Adobe is relatively inexpensive, context is important, especially in an industry where strong earnings growth can drive even higher PE ratios.

This is where Simply Wall St's proprietary Fair Ratio comes in. Adobe’s Fair PE Ratio is calculated at 38.10x, based on a blend of company-specific drivers including its earnings growth prospects, industry, profit margins, market cap and risk factors. Unlike a simple peer comparison, this approach is more comprehensive and adjusts for the company’s unique situation, resulting in a more meaningful benchmark.

Comparing the numbers, Adobe's actual PE ratio (20.86x) is well below its Fair Ratio of 38.10x. This signals the stock is currently undervalued relative to what would be considered fair given the business’s strengths and risk profile.

Result: UNDERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Adobe Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is simply your perspective or “story” about a company’s future, linking what you believe about Adobe’s products, competition, and growth with a set of financial forecasts and a fair value estimate.

Narratives bring numbers to life by connecting the company’s ongoing story to clear, structured assumptions about future revenue, profit margins, and market position. On Simply Wall St’s popular Community page, you can easily explore and create Narratives, review different scenarios shared by millions of investors, and instantly see what kind of fair value your view leads to. This provides a smarter, more dynamic way to decide what Adobe is really worth.

This tool helps you judge whether to buy or sell by comparing your Fair Value to the current price, and it updates dynamically whenever there’s new news or quarterly results to reflect a changing market landscape. For example, some investors see Adobe’s AI integrations and ecosystem as a game-changer and estimate a fair value above $600 per share, while others are more cautious about rising competition and expect fair value closer to $380. Your Narrative shapes how you act on the opportunity.

Do you think there's more to the story for Adobe? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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