Narrative, Meet Adobe
An update on Adobe shares, now trading at 13x free cash flow
As Adobe’s stock price has continued to decline, I thought it was time to revisit the thesis and reinforce my conviction. The stock price should not drive your behavior as an investor, which is why it is important to pause when a stock you own keeps falling.
There is a lot of noise around Adobe, with many AI bear cases and growing fear of competition.
Today, I will present the facts and provide my counterarguments to the most common bear cases.
First, these are the latest facts about the company’s fundamentals:
Adobe grew Q4 2025 revenue by 11% to $6.19 billion.
Adobe’s AI-influenced ARR accelerated throughout 2025.
Total MAUs grew over 15% YoY in Q4 2025.
Adobe expects to grow revenue by another 10% in 2026 to $26 billion.
These are objective facts. There is no debate here.
Based on that—at least so far—we can conclude that the current narrative, and therefore the drawdown, is just that: a narrative.
Now, there are three main bear cases:
AI-native creative tools and smaller competitors replacing Adobe.
Enterprises building in-house tools using AI.
A shift from seat-based pricing to AI consumption directly reducing Adobe’s revenue.
Competitors like Canva, Figma, and more recently Apple are all supposedly eating away at Adobe’s (low-end) market share. In addition, many small AI-native competitors are building tools in specific niches, challenging parts of Adobe’s Creative Cloud suite.
The first point to emphasize is that Adobe is an enterprise business. Its main customers are not low-end creators making YouTube thumbnails, menu cards, or flyers. That is the market Canva targets.
The problem is that these customers are usually the loudest when it comes to complaints about pricing, accessibility, framing Adobe as the “Evil Empire” business, etc.
Most of Adobe’s customers are, in fact, “Creative & Marketing Professionals” and “Business Professionals.”
For enterprises, switching tools works differently than it does for consumers. The entire creative industry is trained on Adobe, starting when they are students. Enterprises store their creative assets within Adobe software. Workflow integration across Adobe products is seamless, much like Apple’s ecosystem, where products work slightly better together than with outside tools.
On top of that, there is Experience Cloud, a separate CRM by Adobe for marketing analytics. Enterprises do not just create content; they publish it and aim to generate revenue from it. This creates further lock-in within the ecosystem.
There are also general switching costs: data migration risks, retraining costs, and a low marginal subscription cost relative to total expenses. This latter point often makes switching not worth the potential savings.
Adobe is the industry standard, which creates strong network effects and increases switching costs further.
Ask yourself: will large enterprises like Disney switch to standalone AI tools to save some money? An Adobe subscription is cheap relative to total enterprise expenses, so it is not worth the switching cost. For these customers, it is a very simple, very rational decision.
Either way, while the low end of Adobe’s customer base is being challenged, which is the least important segment, Adobe still shows it can compete effectively:
“[For FY2025, we saw] over 70% YoY growth of students with access to Express Premium, over 45 new partners added to Express in Q4, including Binder, Bootsuite, and Sprout Social, over 25,000 businesses purchased Express or Studio for the first time in Q4 alone, accelerating QoQ.”
—David Wadhwani
But let’s return to enterprises, because they matter most to the thesis.
The second bear case is in-house production. Bears argue that AI makes it easy to build software. Why keep using Adobe?
Again, this comes down to rational decision-making. Just because AI lowers the cost of building tools does not mean firms should shift their focus. It was always possible to build software internally; it was just not rational. The marginal cost of Adobe is small compared to the cost of switching and building and maintaining your own software.
And even if switching to in-house tool would make sense financially, the switching costs as discussed would still be present.
The third bear case is that AI multiplies productivity, so enterprises will need fewer employees. Because Adobe’s model is seat-based, revenue would decline.
But here is a contrarian thought: why assume content output stays constant? Why not expect a surge in content creation as productivity increases? The same number of designers could produce far more content. And why wouldn’t they?
This would benefit Adobe, given its AI business model. Adobe monetizes through generative credits. Customers pay based on usage. The more AI is used, and the more content is created, the more revenue Adobe generates.
AI raises the content ceiling.
If you are not convinced, consider management’s comments.
As mentioned earlier, MAUs grew 15% YoY. If the bear narrative were true, we should see rising churn instead of very healthy growth.
And aren’t customers leaving Adobe to embrace AI tools? Well, that’s partly true. Enterprises are adopting AI tools, except they are adopting Adobe’s own AI tools:
“Accelerating adoption of our AI functionality by enterprise customers further highlights our leadership and their trust in Adobe’s ability to deliver AI value seamlessly across workflows. In Q4, globally, we drove record bookings of deals greater than $1 million and achieved over 25% year-over-year growth in the number of customers with $10 million plus in ARR.”
—Shantanu Narayen
The most important customer segment, those with over $10 million in ARR, is growing rapidly, driven by AI.
Enterprises want higher productivity. That is rational. But instead of turning to young and unproven AI firms, they go to Adobe, a trusted partner they have relied on for years, and buy AI tools there.
This narrative literally shows up in the numbers. Adobe has the customer base. The customer base wants AI tools. The simplest and cheapest path is to stay with Adobe. Enterprises are leaning in, not pulling back.
That is a distribution moat.
Adobe is also catering to this customer segment through a few ways. The company has expanded Firefly to become the only generative AI tool that is commercially safe and has integrated over 25 leading AI models into its ecosystem. Enterprises can also build custom models trained on their own content, data, and brand guidelines.
“They [enterprises] need more than off-the-shelf models. With Firefly Foundry, we train on their content, data, and brand guidelines, and run it as a managed service. For example, a media company spending about $10 million in ARR on our core products expanded with an additional $7 million for Foundry. Within a few months, their custom models were live, increasing production efficiency and enabling new revenue opportunities through more content and personalization. And that’s just a few franchises, with room to expand.”
—David Wadhwani
These AI products are driving meaningful incremental revenue.
There is also evidence that the AI consumption model may not be as problematic as bears claim. In addition to my view that the number of designers may not decline, generative credit usage is surging. Generative credits tripled QoQ. Adobe is monetizing AI as well as its designers.
First-time Firefly subscriptions also doubled QoQ.
Total AI-influenced ARR exceeded one-third of overall bookings in the latest quarter. The goal is for all bookings to become AI-influenced over time.
If you ignore the stock price and focus only on the business and how it is developing, doesn’t this look like a fantastic story backed by strong numbers?
And doesn’t that suggest that today’s drawdown could be a great opportunity to buy shares of a high-quality business at a sizable discount?
Here is the truth: Adobe generated $7.9 billion in SBC-adjusted free cash flow in 2025. Today, its market cap is about $107 billion.
That implies a P/FCF multiple of roughly 13.5x.
In addition, Adobe is buying back shares at a record pace, repurchasing over $11 billion in 2025 alone and nearly $10 billion in 2024. If the company continues at that pace, the buyback yield would be around 10%.
That is just remarkable.
This is a dirt-cheap valuation for what remains an exceptional business.
I remain a shareholder, and my conviction remains strong.
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.
100% - Adobe has the moat where it matters (enterprise level) and it will be very difficult for anyone to dethrone that. And they can easily make a ‘low end’ version cheap enough to keep competing with Figma/others for low margin semi-pro users.