Shares of Adobe (ADBE 1.29%) tumbled immediately following the company's fourth-quarter earnings release in December, contributing to a massive 38% decline over the past 12 months. Yet the company is actually doing quite well. Its fiscal fourth-quarter update featured 10.5% year-over-year revenue growth and record cash flow from operations. Even more, the company continued repurchasing its shares in droves, suggesting management thinks its shares are undervalued.
Still, investors are increasingly concerned that the proliferation of generative artificial intelligence (AI) will cannibalize the company's legacy design tools.
Ahead of Adobe's earnings report next week, it's a good time to take a look at the stock. With shares down sharply over the last 12 months, is now a good time to buy?
Image source: Getty Images.
Adobe's underlying business remains strong
Overall, Adobe's fourth quarter was exceptional. The company reported a 10.5% year-over-year increase in revenue, putting its top line at $6.2 billion. This capped off a robust fiscal 2025, with total revenue expanding 11% to $23.8 billion.
Key to the company's business, of course, is its subscription revenue from creative software, including photo- and video-editing, document design, and more.
Adobe exited the fiscal year with its digital media annualized recurring revenue (ARR) -- the annualized value of active subscription contracts -- near $19.2 billion, up 11.5% year over year.
Contrary to investor fears, generative AI is currently acting as a catalyst rather than a constraint. Adobe is aggressively integrating its proprietary AI model, Firefly, directly into its flagship applications. And customers are upgrading to higher-tier subscriptions to access these generative capabilities.
To this end, Adobe provided an upbeat outlook in its last quarterly update. Management forecast first-quarter fiscal 2026 revenue of about $6.3 billion at the midpoint of its guidance range, translating to about 9.9% year-over-year growth.
Shares look cheap
Prior to the recent sell-off, Adobe stock routinely commanded a massive premium as Wall Street rewarded the company for its market leadership, its entrenched customer base, its cash-generative business model, and the recurring nature of its revenue. In fact, the stock regularly traded above 40 times earnings over the past five years as investors gladly paid up for its predictable cash flows.
But things have changed dramatically.
Trading at about 16 times earnings at the time of this writing, a valuation like this assumes that the company's pricing power will erode over time, its growth will slow, or both -- these are extremely pessimistic assumptions for a highly profitable market leader with an innovative product suite. At this price, the market is arguably pricing in a worst-case scenario where AI upstarts steal significant market share from entrenched products like Photoshop and Illustrator.
Of course, this is a real risk. Competitors are releasing text-to-video and image generation tools at a breakneck pace. But Adobe benefits from immense switching costs; creative professionals have spent years mastering Adobe's specific interfaces and rely heavily on its comprehensive offerings for collaborative workflows.
NASDAQ: ADBE
Key Data Points
And I believe any risks Adobe faces in the AI-first era we're in are arguably priced into the stock. Even more, the company is taking advantage of its low stock price by aggressively buying back shares. Showing how aggressively it's buying back stock, the company generated just over $10 billion in operating cash flow in fiscal 2025 yet spent almost $12 billion buying back its stock, reducing its share count by more than 6%.
Given the growth stock's deeply discounted valuation multiple and the business's underlying durability, the valuation is arguably just too good to pass up. Of course, the company faces some serious risks. A broader macroeconomic slowdown could prompt enterprise clients to reduce their software budgets, potentially affecting Adobe's ability to cross-sell new AI licenses to its existing user base. And, of course, AI could truly prove to be a disruptive force rather than a catalyst for the company. But I think the stock's low valuation does a good job of pricing in these risks.
