Is Adobe an obvious buy?
or is it a trap?
If you’re reading this, chances are we have a few things in common.
One of them being Adobe on our watchlist.
What a weird journey this stock had.
From May 1993, when I was born, to March 2020, it delivered an impressive 18-19% CAGR, navigating through two major multi-year crises.
But since then, something has changed.
Is this the beginning of the end or just the end of a new beginning?
Or is the reality somewhere in between?
Let’s take a balanced, quick look at Adobe.
Any Quality signals?
As long-time readers may know, I never let valuation be the front-dog of my analyses.
Quality first. How I define it?
This is what I’m typically looking for:
➡️ Ownership Excellence:
🟡 Adobe is not founder-led - both Founders passed away in recent years - but the CEO Shantanu Narayen has been in charge since 2007 (after many years as insider)
🔴 Insider Ownership falls short at 0.33%, with the CEO holding 'just 0.09% (still roughly 200 millions though)
🟢 Employee/Talent Retention: the company ranked #25 in the Fortune 100 Best Companies to Work For® 2024 list; Employee turnover seems lower (10%) than the average in Tech (13%) (source: amazingworkplaces.co)
➡️ Customer centricity:
🟢 Strong Brand Value: Adobe has been a constant presence in the Interbrand Best Blobal Brands list for more than a decade, ranking 17th in 2024 (+12% vs 2023)
🟡 Retention Rates: as retention data seems scattered, I don’t highlight this point as green (although some data suggests 110% or even higher retention rate on some verticals)
🟢 Reccuring Revenues > 95%. This company simply locks customers through their subscriptions model, making it a very stable operating cash flow machine.
➡️ Innovation footprint:
🟢 Relentless R&D spending: representing 18.3% of revenues as of last full-year data.
🟡 Despite the solid track record of new products and features released, it must be said that Adobe has been more a follower than a leader over the last few years.
➡️ Quality flywheel:
Looking at some first numbers, the situation looks intriguing.
Free cash flow > 40%
ROIC > 24%
Blended 2Yr Revenue Growth expected: 9.6%
The ingredients for medium-term compounding effects on earnings look solid.
I don’t count them out
💡 Recently, I’ve been digging into product reviews and industry trends.
Are creators, marketers, and freelancers flocking to AI-powered design apps? Are Canva, Affinity, Figma, or Gimp more viable (and cheaper) alternatives?
Here’s the bottom line.
Theoretically, every Adobe Creative Cloud tool has a substitute.
But no competitor matches its depth, integration, and interoperability.
For a solo freelancer using just one app like Illustrator, switching might make sense.
But for businesses needing multiple tools, Adobe’s bundled solutions remain the smarter (and perhaps still cheaper!) choice.
➡️ Adobe’s ecosystem solutions creates a switching costs type competitive advantage.
Beyond that, I believe Adobe’s brand legacy cements its position with large enterprises - its most lucrative segment - especially amid legal uncertainties in AI.
For example, Adobe markets Firefly’s AI models appear as “commercially safe” and designed to avoid copyright issues, something many emerging apps can’t always guarantee.
➡️ Could things change? Maybe. But I don’t see Adobe’s competitive edge vanishing anytime soon.
Segment mix is brewing
Looking at Adobe’s different streams of revenues, there are some interesing data points.
Document Cloud is growing fast (19% 4-year CAGR) → this is a strong upselling opportunity, as mentioned in various occasions in their IR reports
Experience Cloud experiencing solid growth (13% 4-year CAGR) → that’s a crucial diversification source mainly driven by larger enterprises
Creative Cloud - the core business line - growing 10%.
Additionally, several other product lines seem far from maturity.
Firefly - their AI video generation app - still in a early rump-up stage
GenStudio - Adobe’s new performance marketing one-stop solution - approaching 1B USD in annual recurring revenues, apparently with a significant expansion potential
New AI Agents (Agent Orchestrator): the company just introduced this new feature to support businesses in their CRM and marketing operations. I have no clue how much this could be worth!
New potential acquisitions looming, considering the missed opportunity with Figma
I underestimated the speed at which the company is rapidly catching up with the latest technological trends, despite remaining a follower (not to say copier?).
➡️ Okay Francesco, now give me your numbers.
Risk-Reward looks pretty attractive
As you know, I don’t anchor myself to a fair value.
I work with business fundamentals and market sentiment to derive an educated 5-year risk-reward profile.
In a very conservative bear scenario, I assumed:
🔴 Significant top-line slowdown
🔴 Resulting into very weak sentiment - weaker than it’s ever been
🔴 Margin compression - due to a mix of pricing pressure and additional investments
If the above ended up manifesting, it would justify a money-losing investment over 5 years.
On the contrary, I can see a bull scenario where:
🟢 Revenue re-accelerates and remains consistently above 10%
🟢 Margins stay high - consider that FCF is above 40% now
🟢 Sentiment comes back to a historical average, as the market wipes out the AI-related fears
In this case, Adobe would deliver a 2x in less than 5 years.
➡️ Conclusion
I’ll be honest with you.
I’ve been skeptical about Adobe for many months, but after diving a little bit deeper into the business, I may have turned more bullish for the reasons above.
The risk-reward looks nice.
I’m not buying shares at the moment because I see other compelling opportunities, but if I had to choose between black and white, I’d buy it today to size up in the $320-$330 area.
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Thank you again for your valuable time.
Happy Investing,
Francesco - Business Invest
Have been looking at Adobe myself and there's a lot I like. Just unsure of the reinvestment opportunities or lack thereof.