Adobe's (ADBE 4.02%) stock has been moving in the wrong direction for over two years. The creative software company now trades for just 11.5 times forward earnings after falling below $275 a share for the first time since 2019.
Longtime CEO Shantanu Narayen is departing just as artificial intelligence (AI) threatens to commoditize the company's Creative Cloud moat. While switching costs have always been high, the market is betting that Adobe's competitive advantages are fading as nimbler rivals gain ground.
Yet, the business itself continues to grow at just above 10% on the top line while generating piles of cash. Last year, Adobe earned nearly $10 billion in free cash flow (FCF), outpacing revenue growth, with margins of 41%.
Image source: Getty Images.
Will margins get squeezed?
The stock's slide accelerated in March after the company's net new digital media revenue came up shy of analyst estimates for the first quarter. Adobe's flagship Creative Cloud, which includes Photoshop and Premiere Pro, is facing intense competition.
Competitors like Canva and Figma are gaining traction with simpler, more collaborative tools that threaten Adobe's core Creative Cloud franchise. Canva now has 260 million monthly active users, and Figma is aggressively targeting enterprise design workflows.
Adding to the pressure is the broader fear that generative AI will erode Adobe's pricing power. If AI can perform complex creative tasks in seconds, the value of professional-grade software comes into question. The market's concerned that Adobe's attractive margins could be a thing of the past in this new environment.
NASDAQ: ADBE
Key Data Points
Adobe keeps buying the dip
The company's subscription model drove 11% growth in total annual recurring revenue (ARR), bringing ARR to $26 billion at the end of the first quarter. Adobe's remaining performance obligations, which represent contracted future revenue, stood at $22 billion, reflecting its strong position with enterprise customers.
While the market focuses on the threats, Adobe's cash flow machine continues to run. The company generated $9.8 billion in free cash flow in fiscal 2025, up 24% year over year.
Management is using its cash flow to develop its own suite of AI tools, such as Adobe Firefly, and it recently acquired Semrush Holdings for $1.9 billion. Semrush focuses on brand visibility through its search engine optimization (SEO) capabilities. The acquisition is intended to address the evolving search market as users turn to AI chatbots.
Additionally, the company repurchased $2.5 billion in shares during the quarter. Unfortunately, that's roughly the amount Adobe has reinvested in itself every quarter for going on two years now. So far, the returns on those investments aren't looking pretty.
That said, looking ahead, the stock trades at just 11.5 times forward earnings, with a FCF yield of around 9%. While the stock is far from perfect, the expectations are as low as they've ever been, and there's likely too much pessimism priced in at this point.
