The Market is Misinformed About Adobe’s AI Risks and Blind to Its Margins
Wall Street fears AI will destroy Adobe, and that panic has sliced nearly 25% off the stock this year. But the company’s own financials tell a completely different story about who actually profits when AI goes mainstream.
Adobe (NASDAQ:ADBE | ADBE Price Prediction) keeps slipping, and every new leg down broadens the gap between its share price and its fundamentals. The stock has fallen 24.62% year to date to $263.82. The loudest Reddit post on the name carries the title “ADOBE is cooked.” The crowd thinks AI will commoditize Adobe. I think Adobe is the company getting paid for AI, and I think the margins prove it.
AI Already Pays Adobe’s Bills
Adobe’s AI-first ending ARR topped $650 million, growing more than 150% year over year. Monthly active users passed 1 billion, up more than 20%. Creative freemium users crossed 100 million, up more than 70%, and Firefly ARR grew 40% quarter over quarter. Adobe keeps adding users, then routes them toward paid credits and premium levels. Total ARR reached $27.5 billion, up 11.2%.
Margins Expanding Faster Than Revenue
Third-quarter revenue rose 12.89% to $6.76B, and free cash flow grew 14.68% to $2.438B on just $85M of capex. Management targets a full-year non-GAAP operating margin of approximately 45%. In fiscal 2025, operating income grew 29.15% on 10.53% revenue growth. Non-GAAP EPS of $6.13 topped the $6.09 estimate for a fifth consecutive beat, and Adobe raised fiscal 2026 non-GAAP EPS guidance to $24.45 to $24.50.
Buybacks Do My Compounding
Adobe pays no dividend, so for a retirement portfolio the buyback serves as my income engine. The company retired roughly 8.1M, 8.5M and 9.5M shares across the first three quarters, with $24.55 billion still authorized. Every share I hold claims a bigger slice each quarter. At today’s price, Adobe trades near 11 times the fiscal 2026 consensus EPS of $24.476 and about 10 times the fiscal 2027 estimate.
How Adobe Stacks Up Against Microsoft and Autodesk
The obvious AI story belongs to Microsoft (NASDAQ:MSFT), and it spent $115.95 billion on capex in its latest fiscal year to fund it. Its fourth-quarter free cash flow fell 23.19%, and the stock trades at about 29 times earnings. Adobe’s light-capex model converts AI demand more directly into cash.
Autodesk (NASDAQ:ADSK) grows faster, with revenue up 16.05% last quarter. It guides to a non-GAAP operating margin of ~39%, though, below Adobe’s target. Adobe offers the wider margin.
Real Risk I Track Every Quarter
Adobe deliberately drives users into its freemium model before monetizing them, and RPO grew only 8%. Leadership also changes: Anil Chakravarthy becomes CEO on December 1, ending Shantanu Narayen’s 29 years at the helm. A conversion miss under a new chief would hurt. The risk looks contained. The internal successor knows the business, guidance rose about $50 million at the midpoint, and analysts posted 27 upward fiscal 2026 EPS revisions against 3 downward over 30 days.
Catalysts Investors Should Track Next
Adobe MAX arrives in November, and the Topaz Labs deal should close in Q4. The consensus calls for fiscal 2027 EPS of $27.5076. A business with 45% margins, a billion users and a shrinking share count keeps getting cheaper while it gets better, and investors should watch whether that trend holds.
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