To The Moon

$Adobe(ADBE)$

The markets are showing positive signs today, with green across the board. However, if we take a closer look at the broader picture over the last few days, it's clear that the market is still in the midst of a continuation of a downward trend. It's important to highlight that even though we’re seeing some recovery today, there's still a sense of caution in the air. The volatility of the past few days indicates that investors remain on edge, navigating through uncertainty. Today, we want to focus on Adobe, a company that's been in the spotlight recently, and dive into its current situation, performance, and potential investment opportunity.

Adobe's Performance in the Context of Market Struggles

While many companies have been hit hard over the past several days, Adobe has managed to hold up relatively well. In the last few days, Adobe’s stock is down by just 1%, which is impressive when compared to the significant drops many other companies have faced. However, if we zoom out and look at the broader market, we can see that, like many other stocks, Adobe has experienced a tough ride in 2025. Its stock price has been negatively impacted, much like the rest of the market, especially with the Max 7—Adobe’s various major products—each dropping by double digits. For example, Tesla has seen a significant drop of more than 41%. Adobe itself has dropped 22% in 2025 alone, which means the company has lost more than 20% of its market capitalization in just a few months.

Shifting Investor Sentiment

Despite this, there’s a noticeable shift in sentiment. Investors, while still deeply cautious and showing signs of extreme fear, are slowly transitioning into a less anxious state—into what we’d call “fear,” rather than extreme fear. It’s possible to argue that the worst might be behind us. However, it’s clear that there is still a lot of uncertainty and potential volatility on the horizon. According to a recent Bloomberg report, stocks have started to rebound as a sense of calm returns to Wall Street, but we have to keep in mind that earnings season is upon us, and that typically introduces more volatility into the market.

Tesla's Impact on the Market and Adobe's Role

One of the largest companies under the earnings spotlight is Tesla, and its performance will be closely watched as it reports after market close today. Tesla’s results could set the tone for the broader market in the short term, making it an important stock to watch. However, for today’s analysis, we’ll be turning our focus to Adobe, a company that has drawn significant attention due to its unique position in the market. Interestingly, Adobe holds a triple buy rating from Seeking Alpha, Wall Street analysts, and Quan, indicating that, despite its recent struggles, there’s strong belief that the stock is undervalued.

Adobe's Valuation and Market Trends

Currently, Adobe is trading near its 52-week low, following a major pullback from its all-time highs, which were just under $600. This pullback has raised concerns, but it’s also opened the door for potential investment opportunities. Despite the fact that Adobe doesn’t pay a dividend, it has been taking strategic steps to return excess cash to its shareholders. Adobe is also trading at a forward P/E ratio of just under 17, which is an important metric to consider, especially when comparing it to historical trends. Over the past 12 months, Adobe has experienced a 26% decline in its stock price. As we mentioned earlier, it is down 22% year-to-date. However, it’s important to note that if you’ve been a long-term investor in Adobe over the past decade, your portfolio would still have seen a 355% return, significantly outperforming the broader S&P 500 index.

Is Adobe a Buy? Wall Street's Perspective

Given this context, the question remains: Is Adobe a buy now? Wall Street analysts believe it is, and our analysis aligns with that perspective. Let's dive deeper to explore why. One of the key factors to consider is the forward P/E ratio, which is currently sitting at 16.7—a decade low. While this doesn’t automatically signal a buying opportunity, it’s a significant data point. A low P/E ratio often suggests undervaluation, but it’s also worth noting that a cheap stock can always become cheaper. Still, looking across multiple valuation metrics, whether it's EV/EBIT, forward EV-to-sales, or forward EV-to-free cash flow, Adobe is trading at a decade low across the board.

Undervaluation Across Multiple Metrics In fact, Adobe is now trading cheaper than the S&P 500 for the first time in a long time. This is a significant development, and it suggests that the stock may be severely undervalued when compared to the broader market. Specifically, the forward EV-to-sales ratio is sitting at 6.2, which is also at a decade low. These various metrics all suggest that Adobe may be undervalued relative to its historical performance, making it an attractive opportunity for long-term investors who believe in the company’s future potential.

Share Buybacks and Management Confidence

Beyond the valuation metrics, Adobe has also been extremely shareholder-friendly. In the most recent quarter, Adobe repurchased $11.4 billion worth of its shares, which equates to about 7% of its total market cap. This is a clear indication that management believes the stock is undervalued. In fact, Adobe has been buying back shares at a pace that exceeds the company’s free cash flow every quarter. This level of commitment to returning cash to shareholders is a positive sign for investors who are looking for a company that is confident in its future and willing to reward shareholders for their patience.

Business Model Evolution and Subscriber Growth

Looking at Adobe’s business model, it’s clear that the company has undergone significant changes over the past decade. A decade ago, Adobe shifted from a product-based business model to a subscription-based one. Today, more than 95% of Adobe’s total revenue comes from subscriptions, which has proven to be a more stable and recurring revenue stream. The growth of its subscriber base has been impressive, with the company consistently increasing its number of subscribers year after year.

Revenue Composition and Future Growth

When we break down Adobe’s revenue streams, we see that more than 50% of its total revenue is generated from its Creative division. This segment has been the cornerstone of Adobe’s success and continues to be the largest revenue driver. The Experience division, while smaller, also contributes significantly to Adobe’s overall performance. The fact that Adobe has managed to diversify its revenue base, with strong contributions from both Creative and Experience, speaks to the company's ability to adapt to shifting market demands.

Valuation Compared to Sector and Historical Trends

Despite all the positive signals from a valuation and business model perspective, we’re assigning Adobe a C- grade. This is because, as of now, the company is trading below the sector median, with an 8% discount. But more importantly, when we compare Adobe’s current valuation to where it has traded over the last five years, it’s clear that the stock is now 51% cheaper than it has been historically. This trend holds true across several key valuation metrics, including price-to-cash-flow, price-to-book, and price-to-sales ratios. In fact, Adobe is trading at a discount to even the sector median in some of these metrics, which indicates that it is undervalued not only relative to its own history but also compared to its peers in the industry.

Solid Earnings Performance and Growth Expectations

Looking at the company’s most recent earnings quarter, Adobe posted strong results, with revenue increasing by 10% year-on-year. Adobe also showed impressive margin efficiencies, with gross profit up by 1 percentage point, operating income up by 20%, and net income also growing. Another key highlight was the 13% year-on-year increase in annual recurring revenue, which is an important indicator of long-term growth potential. Adobe’s ability to grow its revenue per subscriber and expand its subscriber base at the same time is a testament to the effectiveness of its business model.

Outlook for Future Performance and Analyst Targets

Looking ahead, Adobe expects strong growth in the next four quarters, with each quarter showing positive year-on-year comparisons. Additionally, Adobe has a 100% track record of outperforming analyst targets over the last four quarters, which is a strong indicator of its ability to exceed expectations. For those looking ahead to the full accounting period in November 2026, Adobe is currently trading at a forward P/E of 15, further indicating that the stock could be undervalued relative to its future earnings potential.

Institutional and Insider Activity: Bullish Indicators

Regarding institutional and insider activity, Adobe is seeing strong institutional support, with institutions holding 82% of the company’s shares. While institutions sold $17 billion worth of shares in the last year, they bought $22 billion worth, showing a net positive interest in Adobe stock. In Q1, institutions bought $1.4 billion worth of shares while selling $349 million worth. This consistent buying behavior suggests that institutional investors remain confident in Adobe’s future prospects.

Insider Buying: Positive Signal for Investors

In terms of insider activity, Adobe has 16% insider ownership. While insiders sold $37 million worth of stock over the past year, they also made some purchases. For example, the CFO bought 1,300 shares in March 2023, worth about half a million dollars. This insider buying is generally viewed as a bullish signal, as executives and insiders typically buy shares when they believe the stock is undervalued.

Congressional Activity and the Broader Investor Sentiment

Finally, it's worth noting that Congress members have been buying Adobe shares recently, with notable purchases in April, March, and February. While insider selling doesn’t necessarily indicate a bearish outlook, insider buying is a strong signal that insiders believe the stock will appreciate in value.

Conclusion: Adobe's Potential as an Undervalued Investment

In conclusion, despite the current market volatility and some short-term uncertainties, Adobe appears to be an attractive investment opportunity. With its undervaluation across multiple key metrics, strong shareholder returns through buybacks, a solid business model, and consistent growth, Adobe may be poised for long-term success. While no investment is without risk, the signals currently point to Adobe being severely undervalued and potentially an excellent buy for those looking to capitalize on a high-quality company at a discount.

Free Cash Flow: The Foundation of Financial Health

Now, let's dive into Adobe’s underlying metrics, starting with free cash flow. We always prioritize this over earnings because earnings can be influenced by management's accounting choices. Free cash flow, on the other hand, gives us a clearer picture of the company's financial health and sustainability. Adobe has shown consistent growth in free cash flow over the long term, and it's expected to reach $20.90 per share in the next 12 months. This is a strong indicator that the company is well-positioned to continue generating cash, which is vital for reinvestment and shareholder returns.

Sales Growth: Consistent Double-Digit Increases

Next, let’s examine sales growth. Over the past few years, Adobe has consistently seen double-digit increases in revenue, even with a slight slowdown. From 10-12% growth over the last three years, to 11% for the trailing 12 months, the company has maintained a strong upward trajectory. Over the last decade, Adobe has more than quadrupled its revenue—from $5 billion in 2015 to $21.5 billion today. This robust growth speaks to the company’s ability to scale and capitalize on its market position.

Share Buybacks: Returning Cash to Investors

Adobe has also been very proactive in returning excess cash to shareholders, particularly through share buybacks. Over the last 10 years, the company has repurchased more than 10% of its shares. This aggressive buyback strategy, especially over the last few quarters, signals that management sees the current stock price as an attractive opportunity. If this trend continues, it’s reasonable to expect Adobe to maintain or even increase its share buybacks in the upcoming quarters.

Return on Invested Capital (ROIC): Strong Capital Allocation

Let’s turn our attention to Return on Invested Capital (ROIC), which is one of our favorite metrics. A ROIC of 10% or higher suggests that a company is effectively allocating its capital. Adobe currently has a ROIC of 32% on a trailing 12-month basis, which demonstrates exceptional capital allocation and management's ability to generate strong returns on investments.

Operating Margin: Consistent Efficiency Improvements

Now, we look at operating margin, a key indicator of a company's efficiency and profitability. Over the past 10 years, Adobe has improved its operating margin significantly, increasing from 19% to 37%. This consistent improvement highlights the company's ability to manage costs while increasing revenue. In addition, Adobe’s free cash flow margins have remained well above the 5% threshold we consider the minimum for high-quality companies, currently sitting at 42%.

Balance Sheet Strength: Zero Net Debt to EBIT

When we consider balance sheet strength, we use the net debt to EBIT ratio, which tells us how many years it would take the company to pay off all its debt net of cash. As of now, Adobe’s net debt to EBIT ratio sits at zero, meaning the company could pay off its entire debt load in less than a day. This is a strong indicator of Adobe’s financial health and its ability to weather economic downturns without facing excessive debt obligations.

Sector Comparison: Above Average Growth and Profitability

Let’s quickly compare Adobe’s growth metrics to the sector. Adobe is projected to achieve an 11% year-on-year revenue growth, which is above the sector's average in the mid-single digits. However, it's slightly lower than its own 5-year growth average of 15% and 14%. In terms of EPS growth, Adobe is expected to grow 15% over the next 3-5 years, which is marginally above the sector’s expected 14%, though again, slightly below its 5-year average of 16%. These figures suggest that while Adobe's growth is still strong, it may be slowing compared to its past performance.

Profitability Comparison: A+ Rating in Gross and Net Margins

On the profitability front, Adobe earns an A+ rating. Its gross margin is a standout at 89%, significantly higher than the sector’s 51% and above its own 5-year average of 88%. The bottom line also shows strong profitability, with a net margin of 31%, well above the sector's 4%. Adobe’s cash generated from operations is nearly $10 billion, far exceeding its 5-year average of $7 billion and significantly outpacing the sector, which generates just $106 million.

Stock Performance: Past and Present

To recap this part of the analysis, Adobe receives a triple buy rating across the board. It scores a C- on valuation, C on growth, and an A+ on profitability. For comparison, when we look at other players in the software sector, such as Intuit, Adobe stands out in many ways. Despite its struggles over the past year—down 26%—and its underperformance over the last 5 years (only up 3.2%), when we zoom out over the past 10 years, Adobe has delivered an impressive 355% return, outperforming the S&P 500.

Past Performance vs. Future Expectations

However, it’s important to remember that past performance is not always indicative of future results. While Adobe has significantly outperformed the S&P 500 over the last decade, it's crucial to assess the potential for future gains based on current and projected market conditions. Over the past 12 months, Adobe has underperformed the S&P by 25%, but this is not necessarily reflective of its long-term prospects.

Financial Statements: Strong Revenue and Growing Net Income

Now, let’s move on to Adobe’s financial statements. The company has seen strong revenue growth over the long term, with revenue more than quadrupling from just under $5 billion in 2015 to $22 billion in the latest annual accounts. The bottom line is similarly strong, with net income growing from $630 million 10 years ago to $5.6 billion today.

Balance Sheet Health Check: Cash vs. Debt

Looking at the balance sheet, total cash has increased slightly over the years, from $4 billion in 2015 to $7.4 billion in the most recent quarter. On the debt side, total debt has more than doubled from $2 billion in 2015 to $6.6 billion today. However, the company’s cash reserves far exceed its debt obligations, and it would take Adobe less than a day to pay off its debt if necessary, showcasing the strength of its balance sheet.

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Intrinsic Value and Discounted Cash Flow Model

Now, moving on to Adobe’s intrinsic value, based on our Discounted Cash Flow (DCF) model. We've conservatively projected an 8% growth rate, which reflects a 13% increase in free cash flow from the previous year, averaging 23% year-on-year over the past 10 years. Our model shows an intrinsic value of $59 per share, which represents a 47% upside from the current price. For those who are more bullish, an assumed 10% growth rate results in a value of $58 per share (69% upside), and a 12% growth rate would push the value to $67.60 per share (95% upside).

Margin of Safety: Evaluating the Opportunity

For investors seeking a margin of safety (MOS), we typically aim for at least 10%. At the current trading price of $458, this indicates that Adobe is not yet at a 35% MOS, but you’re still getting between 30-35% upside based on Wall Street's outlook. They have a triple buy rating and see a target of $518 over the next year, which translates to a 49% upside.

Conclusion: Buy, Hold, or Sell?

In conclusion, while Adobe might not yet be at the level of a 35% MOS, it is still an attractive investment opportunity. With strong fundamentals, a solid track record of profitability, and significant upside potential, it could be a great buy for those with a long-term perspective. Let us know your thoughts: Do you see Adobe as a buy, hold, or sell at the current price?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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