🧵 Deep Dive: Adobe ( $ADBE) One of the biggest SaaS companies in the world by revenue. So why has its stock collapsed over 40% from its 2024 highs? Is the fortress crumbling, or is this the value opportunity the market is missing? We did a deep dive. 🧵👇
2/ The Business Fortress First, understand the machine. $ADBE's empire is built on two pillars, with 95% of its revenue coming from sticky, predictable subscriptions: 1️⃣ Digital Media (74% of revenue): The iconic Creative Cloud (Photoshop, Premiere) & Document Cloud (Acrobat, Sign). This segment alone boasts an $18.1 Billion Annualized Recurring Revenue (ARR). 2️⃣ Digital Experience (25% of revenue): A full enterprise suite for marketing, analytics, and e-commerce.
3/ The Legendary Moat Adobe's competitive moat is legendary. Its tools aren't just products, they're the language of the creative industry. "To photoshop" is a verb... and they have really high switching costs (not just money-wise but mainly skills and time-wise) for millions of professionals. Adobe's moat was appreciated by the most expensive compliment in the world. The failed $20B Figma acquisition, where $ADBE lost the deal and paid a hefty $1 billion breakup fee. It was basically regulators publicly declaring that Adobe's moat is so strong that making it even slightly stronger would be unfair to the entire market. And we like that.
4/ A Rollercoaster of Sentiment The last 2 years for $ADBE stock have been a pure sentiment rollercoaster: 📈 2021 Peak (~$688): Peak tech boom euphoria. 📉 2022 Low (~$300): Hit by rising interest rates & negative reaction to the $20B Figma deal announcement. 📈 Mid-2024 Rally (~$580): Rebounded hard on the AI boom & the launch of its Firefly GenAI. 📉 Now (~$350s-$360s): Pulled back after the Figma deal died and doubts arose about the speed of AI monetization. Here's the critical point: Adobe's recent stock decline appears driven by market sentiment and valuation compression, not a deterioration of its fundamentally strong and growing business. Driven by macro factors (high rates, tech profit-taking), Adobe's forward P/E ratio was crushed from a peak of nearly 50x in 2024 to a much more reasonable ~21x today. The market has repriced the stock, not the company's core performance. Despite the volatile price chart, institutional sentiment remains overwhelmingly positive (see the attached image for high institutional ownership, analyst bullishness and low bearish bets via low short interest). The "smart money" seem to agree: there's a disconnect between Adobe's current price and its fundamental value.
5/ The Growth Machine with Elite Profitability While the stock price has been volatile, the business itself is a model of consistency. Adobe is, simply put, a growth machine. ✅ Consistent ~11% YoY revenue growth, hitting a record $5.87B in Q2 2025. ✅ Management just RAISED its full-year revenue forecast. ✅ The engine behind it all: a massive $18.1 Billion in Annualized Recurring Revenue (ARR) from its core Digital Media segment. And the incredible growth is incredibly profitable. Adobe's margins are stunning: 💰 Gross Margin: ~89% 💰 Operating Margin: ~46% 💰 Net Profit Margin: ~30% 💰 Return on Equity: ~39% Note that $1B Figma goodbye fee was a one-time hit, the underlying profit machine is even stronger. Free Cash Flow Better yet, these aren't just paper profits. $ADBE is a cash cow. It converts over a third of its revenue directly into Free Cash Flow (FCF), generating a trailing FCF yield of over 5% at its current price. That's a very strong figure. This sits on a fortress-strong balance sheet with a ~$3.5B net cash position and an A+ credit rating. This objectively states that the company is built to last. But how does Adobe use all that cash? Instead of dividends, it rewards shareholders with massive stock buybacks. A $25 Billion repurchase program is active. This is key because it more than offsets dilution from employee stock compensation and systematically reduces the share count, increasing value for existing holders.
6/ Valuation So, is $ADBE actually cheap? Let's start with a simple relative valuation against its software peers. Forward P/E Ratios: • Microsoft ($MSFT): ~32x • Autodesk ($ADSK): ~29x • Salesforce ($CRM): ~21x • Adobe ($ADBE): ~17x Adobe is trading at a steep discount, despite having SUPERIOR profitability and cash flow conversion than most in its class. But what is the business intrinsically worth? We ran a Discounted Cash Flow (DCF) model based on its future cash generation. Using conservative growth assumptions (10% FCF growth tapering to 3%) and an 8% discount rate, our model yields a fair value estimate in the $518 – $588 per share range. This DCF model also perfectly explains the stock's recent volatility. The valuation is highly sensitive to interest rate expectations. At a 10% discount rate (fear of high rates), fair value drops to ~$350. Exactly where the stock is today. At a 7% discount rate (rates ease), fair value soars above $600. This shows the market is pricing $ADBE for a harsh macro environment, not its strong fundamentals. Combining all valuation methods, a reasonable fair value for $ADBE today is in the $500 ± $50 range. With the stock in the low $360s, the market is pricing in a pessimistic future that the fundamentals simply don't support. For investors who believe in the moat, this disconnect creates a significant margin of safety.
7/ Key Financial Metrics The numbers tell a clear story of quality and value. Valuation: P/E, PEG, & P/S ratios are all well below their 5-year averages. Financial Health: A rock-solid balance sheet with a juicy Free Cash Flow Yield of ~5.2% (beating the S&P 500). Profitability: Elite returns on capital (ROIC >50%) prove its immense efficiency. ( See our infographic below for details 👇) So what do all these numbers mean? $ADBE today is a high-quality, wide-moat business trading at a reasonable price, not a deep bargain. The investment case hinges on your belief in the durability of its moat and its ability to compound growth for years to come. We've covered the business, the moat, the financials, and the valuation. This thread is just the summary. Our full, in-depth analysis (including the DCF model, a detailed breakdown of risks, and our future outlook) is now live on Substack. Dive even deeper here: 👉 [https://t.co/1zfNDc3IEl]
9/ Our Scenarios (3-5 Year Outlook) So, where does this leave us? Based on our deep dive, we've modeled three potential scenarios for $ADBE over the next 3-5 years. The Bull Case (30% Probability) Adobe successfully monetizes GenAI, reaccelerating revenue growth to 12-15%. The market rewards this with a premium 25-30x P/E multiple. Price Target: $600 - $720 (New all-time highs). The Base Case (55% Probability) Adobe continues on its current path of ~10% annual growth, with AI enhancing its products. The valuation remains fair, leading to solid, market-tracking returns. Price Target: $580 - $600 The Bear Case (15% Probability) A "perfect storm" hits. A global recession, intense competitive disruption from AI, and harsh regulatory action. Growth stalls and the P/E multiple contracts. Price Target: $225 - $270 Our scenarios conclude that $ADBE offers a favorable risk/reward profile. The most probable outcome is steady compounding, while the Bull Case offers a significant upside. The Bear Case, while possible, remains a low-probability event.
10/ Moat Resilience Index™ & Introducing The Moat Index™ To go beyond the numbers, we use our proprietary Moat Resilience Index™ (MRI). • Strength: How strong is the competitive advantage? • Hate: How much pessimism/frustration is there? • Vulnerability: How exposed is the moat to disruption? Here's how $ADBE scores on our MRI: • Moat Strength: 9/10 An industry-standard fortress built on immense switching costs and powerful network effects. Nearly perfect. • Moat "Hate": 6/10 A tale of two audiences: Respected by enterprise and investors, but persistent grumbling from creators over its subscription model and fees. • Vulnerability: 4/10 Secure today, but must watch for long-term threats from AI-native paradigm shifts and the challenge of new user acquisition. The Moat Index™: Our Final Conviction Score These factors feed into our final proprietary score: The Moat Index™, which estimates the probability of a company outperforming the S&P 500 over the next 5 years. For $ADBE, our calculations assigned a Moat Index™ of 70%. This reflects our high conviction in its durable moat, resilient cash flows, and strategic position in the new era of AI.
11/ Conclusion & Final Verdict The long-term picture is quite clear. $ADBE is powered by the durable global shift to digital content. The core thesis is a steady 10-15% annual earnings compounder, driven by its fortress-like market position. Final Verdict: MODERATE BUY to BUY Our official verdict is a very solid Moderate Buy for conservative investors, in case you believe in the Base Case and/or are afraid of 'The Risks', becoming a full BUY if believing in the Bull Case and/or any significant dips occur from here (assuming fundamentals and macro are the same or more favourable). The real opportunity is the asymmetry. The market is currently pricing Adobe as if our Bull Case has a near-zero probability, which is not true. The disconnect between the company's elite financial performance and its public valuation presents a highly favorable risk/reward profile. That is why I bought.
12/ Final Words & Full Analysis Adobe is a classic case of a high-quality company being punished for reasons outside its control. A Hated Moat. It's a best-in-class, cash-flow machine with a nearly impenetrable moat. Our conviction is that $ADBE is a compounder in temporary disguise. The thesis is simple: Buy this franchise while it's out of favor and let its powerful fundamentals drive long-term outperformance. Be aware that none of this is financial advice. This thread covers our core analysis of Adobe. The full 5,100-word deep dive (complete with all our charts, our DCF model, and detailed breakdowns) is now live on Substack. Thank you so much for reading. We hope you found it valuable. [https://t.co/1zfNDc3IEl]
