Adobe (ADBE -2.98%) delivered another record quarter last Thursday. Revenue for the fiscal third quarter of 2026, which ended Aug. 28, climbed 13% year over year to $6.76 billion, adjusted earnings grew even faster, and management raised its full-year revenue and earnings targets.
The stock dipped anyway before recovering, trading at about $252 as of this writing -- roughly a third below its 52-week high.
I think the market is watching the wrong number. The most important figure in the report was $27.50 billion. That number is Adobe's total annualized recurring revenue (ARR), a running yearly total of the subscription money customers already pay the company.
If Adobe keeps growing near the pace management is targeting, that book of business should cross $30 billion within about a year. And I'd consider buying the stock before it gets there.
Image source: Getty Images.
Another record quarter
Alongside the record revenue, non-GAAP (adjusted) earnings per share rose 15% year over year to $6.13, and GAAP earnings per share grew 11% to $4.62. Cash flow from operations climbed about 15% to $2.52 billion, a third-quarter record. Showing how wide Adobe's reach has become, the company said it passed 1 billion monthly active users across its creativity and productivity products. And ARR from the company's artificial intelligence (AI)-first products grew more than 150% year over year.
Nearly all of this business is recurring. Subscriptions made up about 97% of fiscal Q3 revenue. In other words, when the subscription base grows, essentially the whole company grows with it.
That base keeps building. Adobe entered the fiscal year with $25.66 billion of ARR. The total stood at $27.10 billion when the fiscal second quarter closed (helped by about $480 million from the Semrush acquisition) and hit $27.50 billion three months later. The nine-month gain comes to about $1.8 billion, though only about $400 million of it arrived in the latest quarter.
When does $30 billion arrive?
Management's updated fiscal 2026 targets call for ending ARR growth of 10.2% year over year. That puts the book of business at about $28.3 billion when the fiscal year closes in late November.
And if growth simply holds near that guided pace, ARR should pass $30 billion sometime in the second half of next year.
Why buy before a round number instead of after? Because at today's share price, a stall in Adobe's growth already looks priced in. I'd argue every quarter the subscription base keeps compounding makes that view harder to defend.
Growth is cooling, to be fair. Total ARR grew 11.5% in fiscal 2025, and this year's 10.2% target leans on the roughly $480 million that arrived with Semrush. Strip out the acquisition, and the target implies growth closer to 8%.
But interim chief financial officer Steve Day said in the release that Adobe is "expanding our user base through a freemium strategy and deepening engagement with agentic experiences to deliver long-term durable growth."
Free users take time to become paying ones, which may help explain the market's impatience. Even at the slower pace, the subscription base keeps growing every quarter.
The stock isn't priced for any of this
Management also nudged up its full-year outlook alongside the report. Adobe now expects fiscal 2026 revenue of $26.58 billion to $26.63 billion and between $24.45 and $24.50 in adjusted earnings per share, both ranges slightly above the targets it set in June.
At about $252, that works out to roughly 10 times the midpoint of this year's guided adjusted earnings. And analysts project even higher earnings for fiscal 2027, which puts the price at about 9 times next fiscal year's expected total.
Adobe is treating that price as an opportunity. Not only did the company repurchase about 9.5 million shares during the quarter, but its diluted share count is also down about 7% from a year ago. Buybacks at a single-digit forward price-to-earnings multiple retire a lot of stock in a hurry.
NASDAQ: ADBE
Key Data Points
The market has its reasons for the discount. The most obvious one is AI -- whether Adobe's creative tools can keep their pricing power as generative models spread.
And a leadership change is coming: Anil Chakravarthy, the Adobe president who oversees its customer experience orchestration business, takes over as CEO on Dec. 1. Transitions, of course, add uncertainty.
Sure, ARR growth could slow below the guided pace, and no milestone is guaranteed. But a business still adding more than $2 billion of recurring revenue a year on its own, converting it into record cash flow, and shrinking its share count doesn't look like one whose growth is about to stall.
So is Adobe stock a buy here?
I'd consider it. At about 9 times next fiscal year's expected earnings, I like the price today.
