Adobe, a lesson in value investing

Adobe's stock has fallen 70% from its all-time high in 2021, and is down 40% year to date. At $195, it trades back at February 2018 levels.

Yet revenue keeps growing. Margins and profits remain strong. So why is the stock price falling?

The answer is AI. Investing is never about what a company is worth today, but what it will be worth in the future. The market is betting that Adobe will lose significant ground to AI tools. To judge whether that bet is right, we need to understand what Adobe actually sells, who competes for it, and where AI genuinely threatens the business versus where the threat is overstated.

What is Adobe?

Adobe is a software as a service company built around three business segments. Each faces a different competitive landscape, and each carries a different level of AI risk.

Creative and Marketing Professionals

This is Adobe's traditional creative core. It accounts for roughly 60% of revenue and runs at a 95% gross margin. It powers video production, advertising campaigns, enterprise marketing automation, and content creation at scale. The users are designers, photographers, video editors, agencies, and large enterprises.

Revenue in this segment grew 12% year over year. Despite constant attention on AI competitors, this part of the business is still growing at double digits, at massive scale.

The moat is real and structural. Adobe products are an ecosystem that companies train employees on. Clients routinely request final deliverables in native Adobe formats. The core tools are Photoshop for image editing, Illustrator for vector graphics, Premiere Pro for professional video, After Effects for motion graphics, Lightroom for photo workflow, and Firefly, Adobe's own generative AI suite embedded across all of them.

Adobe's strategy is to sell these not as standalone apps but as a bundled ecosystem, Creative Cloud, for around $40 a month. Bundling raises switching costs and gives Adobe pricing power that standalone competitors struggle to match.

The competition is real but uneven. Canva is the biggest low-end threat, targeting casual users more than professionals. Figma, which blends design and lightweight code, is a stronger collaborative threat. Adobe's $20 billion attempt to acquire Figma was blocked by regulators. For video, DaVinci Resolve is improving rapidly and gaining ground, alongside Final Cut Pro, CapCut, and Avid. Despite all of this, Photoshop, Illustrator, and Premiere Pro remain the deeply embedded industry standards among professionals.

Business Professionals and Consumers

This segment is roughly 15% of revenue and Adobe's fastest growing, up 16% year over year. It is the non-creative side of the business: PDF editing, contract signing, presentations, and AI-assisted document tools. The users are everyday consumers, students, small businesses, and office workers.

Adobe invented the PDF in 1993 and remains its industry standard. The core products here are Acrobat, the Acrobat AI Assistant, Adobe Express, and a suite of e-signature and document management tools. The bundle is Document Cloud, around $25 a month.

Adobe holds something close to a monopoly on PDF software. Switching costs are technically low but operationally high, given how embedded the format is everywhere. In e-signatures specifically, Adobe is a smaller player than DocuSign.

Digital Experience

Digital Experience is 25% of revenue with a 72% gross margin. This segment sells enterprises analytics on their own customers: which ad performs best, which image converts, how users move through a campaign.

The core products are Adobe Experience Platform, a marketing operating system for collecting customer data and managing campaigns, and GenStudio, an AI-assisted platform for branded content creation. The bundle is Experience Cloud.

This is Adobe's weakest competitive position. It goes up against Salesforce Marketing Cloud, Oracle CX, and HubSpot. Adobe's advantage is its creative roots. It can connect content creation directly into marketing execution in a way that pure analytics players cannot replicate.

Two adjacent competitors are reshaping this market. Salesforce is pushing into Adobe's territory from the operational side. Snowflake is changing the underlying architecture: large enterprises increasingly want customer data in a neutral cloud platform rather than locked inside any single vendor's ecosystem. That shift weakens the data moat both Adobe and Salesforce have relied on.

How Adobe got here

Adobe was founded in 1982 and went public four years later. Its most consequential invention came in 1993: the PDF, a document format that became so universal it outlasted the software era that created it.

The company's modern chapter began in 2007 when Shantanu Narayen became CEO. In 2013, Adobe made a decision that changed everything: it stopped selling software as one-time purchases and switched to a subscription model. Creative Cloud was born. Revenue climbed steadily for nearly a decade, and the stock followed.

By November 2021, the stock hit $690. Then it started falling.

In September 2022, Adobe announced it would acquire Figma for $20 billion. Investors reacted badly. The price felt too high and the market said so, sending the stock to $278. The deal was eventually blocked by regulators, and Adobe paid a $1 billion cancellation fee. Figma's current market cap is $11 billion, roughly half what Adobe was willing to pay.

The stock briefly recovered to $632 in early 2024, then fell again. By March 2026 it trades at $195. Narayen has announced he is stepping down, adding leadership uncertainty to an already complicated picture. Adobe has responded by announcing $25 billion in share buybacks, a signal that management believes the stock is undervalued.

The AI risk, broken down

Will generative AI make Adobe obsolete? Anyone can now generate a usable ad through OpenAI or Gemini. That is genuinely good enough for very small companies and individual creators. But large enterprises are unlikely to abandon Adobe unless general-purpose AI tools close the quality gap substantially. Notably, Google and OpenAI both share their models with Adobe, so users can generate AI content and immediately edit it inside Adobe's own tools. Adobe currently integrates roughly 25 different AI models this way.

Adobe's own model, Firefly, has one structural advantage: Adobe holds the rights to the enormous volume of images and video its customers create, and can train on that data directly.

Will AI erode revenue by making design faster? Adobe charges per user. If AI makes workflows meaningfully more efficient, companies may need fewer designers, and therefore fewer Adobe seats, to produce the same output. Adobe appears to see this coming: it is shifting from a pure per-seat model toward subscription plus credits, charging separately for AI usage on top of the base plan.

Will generative advertising platforms bypass Adobe entirely? Meta and Google are building tools where a company describes an ad and the platform handles everything: creation, audience targeting, and iteration, without touching Adobe at all. This threat is currently most relevant to small businesses rather than the large enterprise clients that anchor Adobe's core.

The numbers

These are the headline figures as of the most recent reporting period.

Market Cap: $77.58B

Enterprise Value: $78.61B

Revenue growth (Y/Y): 11%

EPS Diluted growth (Y/Y): 12%

Gross margin: 89%

EBIT margin: 37%

Net Income margin: 29%

Across all three segments, margins remain wide and both revenue and earnings per share are still growing year over year. Adobe has also beaten earnings expectations for 18 consecutive quarters. That streak has not been enough to stop the stock's decline.

Valuation

The valuation multiples tell the story more clearly than anything else.

P/E Non-GAAP (FWD): 9x (sector 26x, Adobe 5-year average 27x)

P/E GAAP (TTM): 11x (sector 36x, Adobe 5-year average 38x)

P/B (TTM): 6.8x (sector 4.3x, Adobe 5-year average 14.3x)

EV/Sales (TTM): 3x (sector 3x, Adobe 5-year average 10x)

EV/EBITDA (TTM): 8x (sector 20x, Adobe 5-year average 20x)

Every multiple sits well below both Adobe's own five-year average and the sector average, in some cases by more than half. A forward P/E of 9x against a sector of 26x is a wide gap for a company still growing revenue and earnings at double digits. Whether that gap reflects a market overreacting to AI risk, or a market correctly pricing in a structural decline that has not yet shown up in the numbers, is exactly what the bull and bear case below have to answer.

The bull and bear case

The bear case

AI lowers the cost and skill required to produce creative content, shrinking the seat-based market Adobe has built its pricing model on. Competitors are each taking share at the edges, and Meta and Google's generative ad tools threaten to bypass Adobe's workflow entirely for smaller customers. A 70% drawdown reflects real, structural uncertainty, not just a momentum swing.

The bull case

Despite all of this, Creative and Marketing is still growing at double digits at massive scale, Business Professionals is accelerating at 16%, and gross margins above 70% to 95% across segments remain intact. Adobe's switching costs, data rights, and deep enterprise embedding are not the kind of moat that disappears quickly. The company is actively adapting its pricing model rather than ignoring the threat.

Whether the market has overcorrected or is pricing in a real structural decline depends largely on how quickly AI tools close the quality gap with professional-grade software. Value investing means buying when a market narrative has pushed a price below what the underlying business is likely worth. It also means accepting that the narrative is sometimes right. The numbers, not the story, are what settle which one this is.

*This article is for educational purposes only and does not constitute financial advice. Always do your own research before making investment decisions.*