Buy Alert (From TradingTips)
At a Glance
- In 2025, the market hit Adobe hard, causing shares to lose more than a fifth of their value.
- The company's latest earnings neither excited nor greatly disappointed investors.
- Disruption from AI tools and emerging competitors has cast a dark cloud over the stock. However, there is reason to believe that markets are too pessimistic on ADBE.
For software behemoth Adobe (NASDAQ: ADBE), 2025 has been anything but a good year. Year-to-date, shares are down 21%, trading near $350—a massive 45% decline from their all-time high of $635, reached in February 2024.
Despite this steep downward trajectory, shares got a bit of relief after the tech company posted its latest financial results on Dec. 10. The stock closed up by around 2% the next day in reaction to the company’s solid but not game-changing release. The results provide a clearer view of where the stock may be headed next.
Ultimately, Adobe is currently priced at a level that implies tepid growth going forward. This could lead to significant long-term upside for the stock if the firm can outperform these low expectations. Still, competition and disruption are mounting, making the company’s future difficult to predict.
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Adobe’s Beats Across the Board, Leading to a Modest Gain in Shares
In its Q4 fiscal year 2025 (FY2025), Adobe recorded revenue of $6.19 billion, or a growth rate of 10%. Note that the company’s fiscal reporting period is about one quarter ahead of the calendar period. This beat sales estimates of approximately $6.11 billion. The company’s adjusted earnings per share (EPS) increased by around 14% to $5.50. This moderately beat estimates of $5.40.
Annualized recurring revenue (ARR) is an important metric for the company. This represents the value of customer subscriptions over the next year. The figure ended FY2025 at $25.66 billion, rising by 11.5%. In FY2026, Adobe expects ARR growth of just over 10%. At their midpoints, Adobe projects that it will generate $26 billion in revenue and adjusted EPS of $23.40. These represent growth rates of 9.3% and 11.7%, respectively. The figures were slightly ahead of expectations, contributing to Adobe’s rise on Dec. 11.
Adobe & AI: The Market’s Tug of War
The primary overhang on Adobe stock is the belief among many investors that artificial intelligence (AI) tools will significantly limit the company’s long-term growth. Image generation tools, such as Alphabet’s (NASDAQ: GOOGL) Gemini Nano Banana Pro, directly challenge Adobe’s traditional offerings, like Photoshop. Outside of AI-specific tools, key competitor Figma (NYSE: FIG) is growing at rates north of 35%.
Adobe has invested significantly in building its own AI capabilities as it seeks to counter this disruption. AI tools are seeing strong engagement. For example, customer usage of generative AI credits increased threefold in just one quarter. The use of AI features in Acrobat and Reader also increased by four times compared to the prior year. Furthermore, ARR from content automation offerings, such as Firefly Services and Firefly Foundry, doubled from the prior year. These metrics show that customers are rapidly increasing their use of Adobe’s AI offerings despite competition.
Still, markets worry that these investments will not lead to a reacceleration in revenue growth. The company’s FY2026 ARR forecast implies a decline from 11.5% to 10.2%. At the same time, Adobe’s current valuation is justifiable even if growth is significantly lower than 10% long-term. However, this would require that Adobe’s free cash flow margin doesn’t stray far from its very high level of 41% long-term.
It is certainly possible that margins could face pressure. Boosting investments or increasing customer acquisition and retention spending to fend off competitors are two key ways that this could materialize. The company’s adjusted operating margin in FY2025 was around 46.2%. Notably, Adobe expects a moderate contraction in this figure to 45% in FY2026. A contraction in this figure could also pressure the free cash flow margin.
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ADBE: A Cash Cow Up Against Low Expectations
MarketBeat tracked two Wall Street analysts who updated their Adobe price targets on Dec. 11. TD Cowen’s $400 target and DA Davidson’s $500 target both imply upside versus the stock’s Dec. 11 closing price near $350. The MarketBeat consensus price target near $419 implies around 20% upside potential.
Overall, given the relatively meager expectations baked into Adobe’s share price, the stock’s risk-reward profile looks moderately skewed to the upside. Still, investors need to keep a close eye on this name going forward.
Establishing itself as a true force to reckon with in the rapidly evolving AI landscape is key to the stock's long-term success.
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