- ADOBE
US EQUITIES
Adobe : value trap ?
- Adobe reported strong financial results on March 12, 2026, yet its stock fell 7% the following day, bringing its year-to-date decline to 30% and its year-over-year decline to 37%. The company is the market leader in digital creative software. Among its best-known products are Acrobat, Photoshop, Premiere, and Lightroom…
- Adobe continues to post respectable growth figures for the most recent quarter: revenue ex FX up 11%, revenue to be recognized over the next 12 months up 11%, and adjusted operating income up 12%. Adobe is also growing its large base of monthly active users: 850 million, up 17% year-over-year. Adobe has 80 million “freemium” users, a pool of future paying customers, up 50%. Adobe is highly profitable: its operating margin was 47.4% in the last quarter, and free cash flow to shareholders is substantial at 40% of revenue. The company has no debt and returns all of its free cash flow to shareholders, which amounts to 12% of its market capitalization. Yet the stock is at its lowest level since 2019, and its valuation reflects that of a company with no growth.
- Investor skepticism is nothing new. Adobe, once a star software stock thanks to its successful transition to a SaaS business model in the 2010s, became a fallen angel on September 15, 2022. On that day, management announced the uncompleted acquisition of Figma for a price deemed excessive by investors (>50x revenue for $20 billion). Moreover there is a new competition from publishers like Canva, which target the general public, Adobe’s future market after having conquered creative professionals.
- Investor skepticism intensified with the emergence of generative AI, which could slow down or even destroy its creative software business. How? Adobe might not be able to raise its prices without losing customers. Yet price increases have been a major driver of its growth in recent years. Furthermore, the profession of professional creators well-versed in using Adobe software suites could be on the verge of extinction with the use of new modern generative AI solutions for images, audio, and video (MetaAI, Midway, Nano Banana, Sora, Runway…). This is reminiscent of the disappearance of blacksmiths in the early 20th century, the demise of the Minitel, the fall of mobile phone before the Iphone, Kodak, and many others…
- What could halt the stock’s decline? One possibility is an acceleration in the contribution of generative AI to its profits. However, Adobe appears to be playing more of a retailer role in this area. Adobe is not a leader in IT infrastructure or cutting-edge AI models. Although AI could contribute around $500 million revenue in 2026, this new business is likely to be margin-dilutive.
- In conclusion, investors anticipate a major disruption in the software industry in the years to come. Adobe stock price is a striking example of this. At this stage, we prefer to stay on the sidelines and focus on companies whose business models are not as vulnerable to new competition from generative AI.
