Adobe's Best Year Ever, Still at a Discount
Adobe ($ADBE): Q4 results and updated valuation
Adobe closed its fiscal year with record-breaking results across virtually every part of the business. Revenue reached an all-time high, as did cash flow, and the company bought back more shares than ever in 2025.
Key operating metrics are equally encouraging. Monthly active users continue to grow, AI consumption is accelerating, and the number of enterprise customers keeps rising.
Unsurprisingly, the earnings call again centered on AI. Adobe highlighted its partnerships with leading AI companies and emphasized how well its strategy is playing out. Shares reacted somewhat positively and are up just over 3% over the past week, but there is still significant upside.
There was no talk about disruption because there is no disruption. Yet the stock is priced as if disruption risk is high.
Below is my analysis of Adobe’s Q4 earnings and updated valuation.
Record-Breaking Quarter and Year
Adobe’s Q4 revenue grew 10% YoY to $6.19 billion, beating guidance of $6.1 billion. Revenue continues its steady, highly consistent upward trajectory.
For the full year, revenue reached $23.77 billion, up 11% YoY and ahead of initial guidance of $23.30 to $23.55 billion. While growth has slowed compared to Adobe’s five- and ten-year averages, that is largely the result of the law of large numbers. In absolute dollar terms, Adobe is growing faster than ever.
Profitability also hit new highs. Q4 operating income rose 16% year over year to $2.3 billion, while operating cash flow increased 8% to $3.16 billion.
For the full year, operating income reached $8.7 billion, up an impressive 29% YoY, though following a flat 2024. Operating cash flow totaled $10 billion, implying an operating cash flow yield of 6.7%.
Essentially every financial metric is moving in the right direction. But the stock is not. Shares are still down 39% over the past two years.
Management, however, is clearly confident. Adobe repurchased 7.2 million shares in Q4 and 30.8 million shares for the full year, reducing the share count by 6% after dilution. This was the largest buyback year in the company’s history.
Partnerships, Gen-AI, and Enterprise Growth
Adobe continues to integrate third-party AI models such as OpenAI and Google Gemini directly into its products. Rather than competing with these models, Adobe has turned them into assets.
Alongside its own Firefly models, users now have unprecedented choice and flexibility when applying AI to creative workflows. Crucially, all of this remains inside the Adobe ecosystem, avoiding fragmented workflows that would otherwise degrade the user experience.
Across apps like Photoshop, Illustrator, and Premiere, customers can use multiple AI models to create almost anything they want.
Adobe is also expanding distribution. It partnered with YouTube to integrate Premiere mobile into YouTube Shorts and launched Photoshop mobile to meet users where they already are.
Most notably, Adobe recently announced a partnership with ChatGPT. ChatGPT users can now access Photoshop, Express, and Acrobat directly within the ChatGPT interface. Adobe views this as a powerful top-of-funnel channel:
“And so we are taking all of our technology and making sure that it can run in these LLMs. They represent, in our mind, a great top of funnel... They let us reach new users that we wouldn’t have reached with some of the traditional markets that we go through, and we can engage them in new ways... It gives us the opportunity to flow them into our full paid plan. So it’s a real top of funnel game with a conversion opportunity on the back end of that.
And maybe the more important element of why this is such a critical moment for us is that as LLMs start embracing these model context protocols, these MCP endpoints, it’s no longer that these LLMs are about a prompt to a model and a response... It now gives us the opportunity to have the LLMs actually work with models and APIs, and that plays to a really strong strength and durable differentiator given the incredible APIs we have across creativity and productivity.”
LLMs are increasingly becoming interface layers rather than simple chat tools. They can browse, shop, access software, and now interact directly with tools like Photoshop.
Adobe is also positioning itself where its enterprise customers’ end users are. Its LLM Optimizer, effectively SEO for LLMs, helps marketers optimize brand visibility within LLMs.
To strengthen this capability, Adobe recently acquired SEMrush for $1.9 billion. SEMrush brings generative engine optimization alongside traditional SEO, making Adobe’s Digital Experience segment more comprehensive and better suited for the “Agentic Web.”
Now, another reason for concern has been competition, particularly from lower-end tools like Canva.
But Adobe is largely focused on the high end of the market. In Q4, Adobe drove record bookings for deals larger than $1 million and grew the number of customers with over $10 million in ARR by more than 25% YoY. Large customers are clearly not leaving the platform.
Firefly adoption is accelerating within enterprises. Generative credit consumption across Creative Cloud, Firefly, and Express grew three times QoQ in Q4. More than 100 new Firefly deals were signed, including major enterprise customers such as Coca-Cola, IKEA, JPMorgan, Nintendo, and Sony.
Firefly Foundry further deepens enterprise relationships. Custom models are critical for commercial safety and brand consistency, and with creative assets already housed inside Adobe, Foundry fits perfectly.
“We’ve been hearing more and more from customers that in order to take it to the next level, they need more than what off-the-shelf models can provide. And as a result, we introduced Foundry… the core value is that we train on their content, their data, and their brand guidelines. We’re able to generate images, videos, audio, and 3D models… operated as a managed service.
So marketing teams can train on product shots, environment styles, and brand guidelines, and media companies train on their individual franchises… characters, sets, props, and locations so they can generate the whole thing.”
The long-term vision is that every brand, franchise, TV show, or movie can have its own custom model.
Foundry is also financially meaningful for Adobe. Management cited an example of a customer spending $10 million annually on core creative products that added Foundry for $7 million, highlighting the upsell potential.
In fact, over 75% of Digital Media net new ARR came from subscriptions, cross-sell, and upsell, with only 25% driven by price increases.
Even in the low end of the market, Adobe is advancing. In education, Express premium usage among students rose 70% YoY. Over 45 new Express partners were added in Q4, and more than 25,000 businesses adopted Express for the first time, accelerating QoQ.
Q4 capped a consistently strong year. Management guided for another solid year ahead, with 2026 revenue expected to reach $26 billion, implying 9.4% growth, and EPS of $18. At current prices, Adobe trades at roughly 20x forward earnings.
In terms of valuation, expectations remain low. Based on roughly $9.9 billion in 2025 free cash flow, Adobe only needs to grow free cash flow by about 4% per year over the next decade to justify today’s price.
Let that sink in. It’s barely above inflation. With revenue guided to grow close to 10%, there’s a real disconnect.
Management clearly agrees. As long as the balance sheet allows, continued aggressive share repurchases remain the best choice.
As premium members know, my initial buy target was anywhere below $370. With free cash flow jumping from $7.8 billion in 2024 to $9.9 billion in 2025, the valuation has only become more compelling.
Even today, I still view any price below $400 as a very attractive entry point.
Thanks for reading.
Lucas
Author & Founder, Summit Stocks
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Disclaimer: the information provided is for informational purposes only and should not be considered as financial advice. I am not a financial advisor, and nothing on this platform should be construed as personalized financial advice. All investment decisions should be made based on your own research.