Adobe: Transforming Creativity Into Cash Flow

Adobe is a global software company whose tools are used every day by individuals, creators, and businesses to create, edit, and manage digital content. From well-known products like Photoshop, Acrobat, and Illustrator to its growing platforms for marketing and customer experience, Adobe plays a central role in how content and digital experiences are produced and delivered. The company combines strong brands, recurring subscription revenue, and deep integration into professional and enterprise workflows. As digital content continues to grow in importance across industries, Adobe is positioning itself as an end-to-end solution across the entire content lifecycle. The question remains: Does Adobe deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Adobe at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Adobe, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Adobe was founded in 1982 and has grown into one of the largest and most diversified software companies in the world. Over more than four decades, it has evolved from a niche publishing software firm into core infrastructure for digital content creation, document management, and customer experience orchestration. Today, Adobe sits at the center of the global content economy, serving individual creators, small businesses, large enterprises, and marketing organizations across virtually every industry. Adobe’s business model is overwhelmingly subscription-based, with the majority of revenue coming from recurring subscriptions across Creative Cloud, Acrobat, Firefly, and its digital experience solutions. This model provides highly predictable and resilient cash flows, strong margins, and significant operating leverage. By continuously delivering updates and new functionality rather than relying on one-off software licenses, Adobe has embedded itself deeply into customer workflows and long-term budgets. At a strategic level, Adobe positions itself as an end-to-end platform spanning the entire content lifecycle, from ideation and creation to production, activation, and optimization. Its tools power the first creative spark, the development of content and media, and the personalized delivery of digital experiences across channels. As creativity increasingly becomes a core function across roles and industries, Adobe’s addressable market continues to expand beyond traditional designers and media professionals. Adobe’s competitive moat is built on a combination of brand strength, high switching costs, deep enterprise entrenchment, and network effects. Its brand is one of the strongest in global software, particularly in creative industries, where products such as Photoshop, Illustrator, and Acrobat are category-defining. The fact that “Photoshop” has become a verb reflects the extent to which Adobe’s tools are embedded in both professional culture and everyday language. This brand dominance lowers customer acquisition costs, supports premium pricing, and reinforces Adobe’s position as the default standard in creative and document workflows. Switching costs represent another powerful and durable advantage. For professional users and enterprises, moving away from Adobe involves far more than replacing a subscription. It requires retraining teams, migrating vast libraries of creative and document assets, reconfiguring workflows, and risking compatibility issues with clients, agencies, and partners. These costs increase exponentially at scale, which helps explain why Adobe reports that 99% of Fortune 100 companies use its products. This level of enterprise lock-in provides a strong revenue floor that consumer-focused competitors struggle to undermine. Adobe also benefits from network effects created by its file standards. Formats such as PSD, AI, and PDF have become the common language of the design and document world. Designers, agencies, clients, and enterprises all expect these files to open, edit, and behave the same way across teams and organizations. Day-to-day collaboration, handoffs between agencies and clients, and years of archived work rely on this compatibility. While newer competitors are trying to introduce alternative or more open formats, professional workflows tend to resist change. Once a file standard is widely adopted, switching away from it creates friction, breaks existing processes, and risks compatibility issues. As a result, these standards become deeply embedded across industries, making it very difficult for new formats to replace Adobe’s position. Increasingly, Adobe’s moat is strengthened by how well its products work together, rather than by any single application on its own. Creative professionals, marketing teams, and business users are now working more closely together as companies produce more content, faster and across more channels. This has created a need for shared tools and connected workflows. Adobe stands out by linking creative tools with marketing execution, analytics, and customer data in one integrated platform. Content can move smoothly from design to delivery to performance measurement without being rebuilt or transferred between disconnected systems. This makes collaboration easier and more efficient, while also increasing switching costs, since replacing Adobe would often mean changing tools across multiple teams at the same time.

Management

Shantanu Narayen serves as the CEO of Adobe, a role he has held since 2007 after previously serving as President and COO. He joined Adobe in 1998 as Vice President and General Manager of the Engineering Technology Group and steadily rose through the organization, reflecting both his technical depth and his ability to lead at scale. In 2017, he also became Chairman of the Board, further cementing his influence over Adobe’s long-term strategy and governance. Shantanu Narayen brings a strong and well-rounded academic background to the role, holding a bachelor’s degree in engineering from Osmania University in India, a master’s degree in computer science from Bowling Green State University in Ohio, and an MBA from the University of California, Berkeley. This combination of engineering, computer science, and business education has shaped a leadership style that blends technical credibility with strategic and commercial discipline. His tenure as CEO has been defined by a series of transformative decisions that reshaped Adobe’s business model and competitive position. Most notably, he led the transition from boxed software licenses to a cloud-based subscription model with the launch of Adobe Creative Cloud in 2013. At the time, the move was controversial and well ahead of industry norms, but it fundamentally changed Adobe’s trajectory. By shifting to recurring subscriptions, Adobe achieved greater revenue visibility, closer customer relationships, and the ability to innovate continuously rather than through infrequent product cycles. This decision is widely regarded as one of the most successful business model transformations in modern software history. Beyond Creative Cloud, Shantanu Narayen has overseen Adobe’s expansion into digital marketing, customer experience, and data-driven personalization, transforming the company from a creative software leader into a core platform for the entire content lifecycle. Under his leadership, Adobe has consistently invested in organic innovation while also executing disciplined acquisitions that strengthened its position in enterprise workflows. More recently, he has guided Adobe’s approach to artificial intelligence with a clear emphasis on trust, brand safety, and commercial usability, positioning the company as a responsible leader in generative AI rather than a follower chasing short-term trends. Shantanu Narayen is also widely recognized for fostering a strong corporate culture that emphasizes innovation, inclusion, and long-term thinking. Adobe has repeatedly been named to Forbes’ World’s Best Employers list, Fortune’s Best Workplaces in Technology, and the Wall Street Journal’s Best-Managed Companies list. These recognitions reflect his ability to scale a complex global organization while maintaining employee engagement and a clear sense of purpose. His leadership has earned broad external recognition. Shantanu Narayen has been named multiple times to Barron’s list of the World’s Best CEOs and ranked among the top CEOs globally by Glassdoor, with consistently high approval ratings from employees. Comparably places him in the top tier of CEOs for companies of similar size, highlighting both operational execution and internal trust. With more than two decades at Adobe and nearly two decades as CEO, Shantanu Narayen has demonstrated an exceptional ability to anticipate industry shifts and act decisively ahead of competitors. His track record of long-term value creation, disciplined strategic decision-making, and steady leadership makes him uniquely well suited to guide Adobe through its next phase of growth.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Adobe’s ROIC is not only very high, it has also improved in a remarkably steady way over the past decade. That combination is usually a sign of a business whose economics have structurally improved rather than one benefiting from short-term factors. In Adobe’s case, the main reason is how the company has reshaped its business model and reinforced its competitive position over time. The most important driver has been the shift to subscriptions. When Adobe moved from selling boxed software to Creative Cloud, it created a business with recurring, predictable revenue and very low incremental costs. Once the software platform is built, adding new users or selling more features to existing customers requires very little additional capital. Revenue can grow much faster than invested capital, which naturally pushes ROIC higher year after year. Operating leverage has strengthened this effect. Because Adobe sells software, it has high margins and relatively fixed costs. Once the products are built, serving more customers or selling more subscriptions does not require much additional spending. As a result, revenue growth translates into an even faster increase in profits, while the amount of capital invested in the business grows much more slowly. The steady rise in ROIC over time shows that this is a built-in advantage of Adobe’s business model, not the result of short-term cost cutting or temporary margin boosts. Adobe’s competitive moat has also played a major role. Strong brands, high switching costs, and deep integration into professional and enterprise workflows give Adobe meaningful pricing power. The company can raise prices, introduce premium tiers, and add new functionality without losing customers. That allows earnings to increase without requiring more capital investment, which further lifts ROIC. Strong capital allocation has further supported Adobe’s high returns. The company does not need to invest heavily in physical assets like factories, inventory, or logistics to grow. Most acquisitions have been software businesses that fit naturally into Adobe’s existing platform, rather than large, capital-intensive expansions. In addition, Adobe has consistently repurchased shares, which reduces the amount of capital tied up in the business relative to the profits it generates, helping to keep ROIC high. Looking ahead, it is reasonable to expect Adobe’s ROIC to remain very high, even if it does not keep rising at the same pace. At current levels, further increases become harder simply because the company is already operating extremely efficiently. However, there is nothing in the business model that suggests a structural decline. The subscription model, pricing power, capital-light nature of software, and strong customer lock-in all remain intact. The main risks would be sustained pricing pressure, a shift toward lower-margin growth areas, or a need for much heavier investment to stay competitive, particularly in AI. So far, Adobe has shown an ability to balance innovation and returns by building new capabilities on top of its existing platform rather than chasing growth at the expense of profitability.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. Adobe’s equity development looks unusual at first glance, but it makes sense once you consider the nature of the business and how management allocates capital. For most of the past decade, equity grew steadily, which reflects consistent profitability and retained earnings. That period aligns with Adobe’s strong operating performance and the successful transition to a subscription-based model. The decline in equity over the past two years is not a sign that the business is weakening. It is mainly the result of share buybacks. When Adobe repurchases its own shares, it uses cash to reduce outstanding equity, which lowers total shareholders’ equity on the balance sheet. If buybacks are larger than net income in a given year, equity will decline even though the company remains profitable and cash generative. This effect is especially pronounced for Adobe because it is a software company with a capital-light model. Adobe does not need to reinvest large amounts of capital to grow, and much of its real value, such as brand strength, customer relationships, file standards, and embedded workflows, does not appear on the balance sheet. As a result, book value is a weaker indicator of business quality or intrinsic value than it would be for asset-heavy companies. The equity decline also fits with Adobe’s very high ROIC. When a company consistently earns high returns, retaining too much capital can actually reduce efficiency. Returning excess capital to shareholders through buybacks can increase per-share value, even if total equity shrinks. In this context, falling equity alongside strong earnings and free cash flow is a sign of capital discipline rather than value destruction. This would only be a concern if equity were falling because of ongoing losses, large write-downs, or rising financial stress. That is not the case for Adobe. The balance sheet remains solid, and the reduction in equity is largely a management choice.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Adobe’s free cash flow is consistently strong because of how the business is built, and the record level reached in fiscal year 2025 is a continuation of long-term trends rather than a one-off result. Adobe sells software almost entirely through subscriptions, which creates recurring and predictable revenue, while the cost of serving additional customers is low. Once the products are developed, revenue can grow without a similar increase in spending, allowing a large share of profits to turn into cash. This structure explains why free cash flow margins have remained high for many years. Adobe benefits from high gross margins, limited capital spending needs, and disciplined operating costs. Even during periods of heavier investment, such as the current push into AI, those investments are mostly layered onto existing products and infrastructure. That means they support future growth without significantly hurting cash generation in the present. Pricing power and customer lock-in also play an important role. Adobe’s tools are deeply embedded in professional and enterprise workflows, which allows the company to raise prices and introduce higher-value features with limited customer churn. This supports steady growth in both revenue and cash flow without requiring large increases in investment. In fiscal year 2025, Adobe demonstrated the strength of this model by generating over $9 billion in operating cash flow while continuing to invest in AI product innovation. At the same time, the company returned a large amount of capital to shareholders through share repurchases, buying back nearly $12 billion of stock and reducing shares outstanding by more than 6%. This reflects management’s confidence in Adobe’s long-term cash generation and balance sheet strength. Free cash flow is mainly used in three ways. Adobe reinvests in the business through research and development, particularly in AI-driven capabilities and platform improvements. It also uses cash for selective, software-focused acquisitions that fit into its existing ecosystem. Finally, excess cash is returned to shareholders, primarily through share buybacks, which have become an increasingly important part of capital allocation. With several billion dollars still authorized for repurchases, this is likely to remain a key use of free cash flow. Looking ahead, it is reasonable to expect Adobe to continue generating high free cash flow and maintain strong margins. While the pace of growth may fluctuate, the underlying drivers remain intact. The subscription model, capital-light structure, pricing power, and deep customer relationships all support durable cash generation. The free cash flow yield is at its highest level in more than a decade, suggesting that the shares may be trading at an attractive price. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to look at is debt, as it is important that a company keeps debt at a level that can be repaid within three years. This can be assessed by comparing long-term debt to annual earnings. Based on Adobe’s data, the company has debt equal to only about 0,89 years of earnings, which is well below the three-year threshold. This indicates a very strong balance sheet. Adobe’s low debt level is supported by its consistently strong free cash flow. The company generates more than enough cash each year to cover interest costs and reduce debt if it chose to do so. This provides flexibility, even in periods where Adobe is investing heavily in new products or returning capital to shareholders. Management has consistently taken a conservative approach to debt, focusing on financial stability alongside growth. Taken together, Adobe’s modest leverage, strong earnings, and cash generation suggest that debt is unlikely to be a concern in the coming years.

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Risks

Competition is a risk for Adobe because the company operates in markets that are both fast-moving and highly crowded, where customer needs, distribution models, and pricing expectations can change quickly. While Adobe holds strong positions across creative software, document productivity, and digital marketing, it faces pressure from a wide range of competitors targeting different parts of its customer base. One source of risk is the sheer breadth of competition. Adobe competes not only with large, well-capitalized global software companies, but also with smaller, more focused players that specialize in specific tasks or user groups. These competitors can often move faster, focus on a narrower use case, or appeal more strongly to price-sensitive customers. In some segments, barriers to entry are relatively low, making it easier for new products to gain traction, especially if they are simpler, cheaper, or bundled into broader platforms. Pricing pressure is a related concern. Adobe’s subscription model relies on renewals, upselling, and long-term customer relationships. If competitors offer lower-priced or free alternatives that are “good enough” for certain users, this can increase churn risk at the lower end of the market and make it harder to raise prices over time. This is particularly relevant for students, freelancers, and small businesses, where budgets are tighter and switching costs are lower than in large enterprises. A clear example of this dynamic is Canva’s decision to make the Affinity suite free forever following its acquisition of Serif. By offering professional-grade design tools at no cost, Canva directly targets Adobe’s entry-level funnel. Users who might previously have started with Adobe products during their education or early careers now have a credible alternative with no financial commitment. Over time, this could reduce the number of users who naturally grow into Adobe’s higher-priced subscriptions. Canva also represents a different kind of competitive threat because it combines design tools with commerce and distribution. Its platform integrates templates, stock assets, print-on-demand, and collaboration features in a single, easy-to-use environment. For non-professional users, this bundled value proposition can be more attractive than Adobe’s pure software subscription, even if Adobe’s tools remain superior for advanced use cases. Competition is also intense across Adobe’s other customer groups. In productivity and document workflows, Adobe faces competition from general productivity platforms and operating system-level tools that increasingly include built-in editing, signing, and collaboration features. In creative tools, Adobe competes with both established professional software and newer, mobile-first or web-based applications that emphasize ease of use and collaboration. In digital marketing and customer experience, Adobe faces large enterprise software vendors, specialized point solutions, and in-house systems built by customers themselves.

The AI paradox is a risk for Adobe because the same technology that expands creativity and productivity can also reduce the perceived value of professional software over time. As generative tools become more capable, they lower the skill and time required to create visual assets, documents, and marketing content. This creates a tension for Adobe: AI makes creation easier, but in doing so, it may weaken the need for complex, high-priced tools. A key part of this risk is the “good enough” effect. If users can generate acceptable content through simple prompts at a low cost, the demand for advanced tools such as Photoshop or Illustrator may decline outside of the most demanding professional use cases. As AI quality improves, the gap between amateur output and professional output narrows, which could reduce the total addressable market for high-end creative software, particularly among small businesses, marketers, and individual creators. There is also a risk that creative workflows become increasingly model-driven rather than tool-driven. Users may care less about which software they use and more about access to the best underlying models. If open or third-party models advance faster than Adobe’s proprietary offerings, users may choose to work directly in AI-native environments instead of within Adobe’s ecosystem. In that scenario, Adobe risks losing its position as the default starting point for content creation, even if its tools remain powerful. AI also introduces deflationary pressure on software pricing. When tasks that once took hours can be completed in minutes, customers may question the value of paying the same price per user. Productivity gains do not automatically translate into higher willingness to pay. Unless Adobe can capture that added value through new workflows, higher volumes, or differentiated features, subscription pricing may come under pressure over time. This creates a difficult balancing act. Adobe must aggressively integrate AI to remain relevant, but doing so risks simplifying its products to the point where users no longer need advanced functionality. At the same time, moving too slowly risks allowing new AI-native workflows to form outside Adobe’s control. Both paths carry execution risk. Finally, monetization uncertainty adds to the challenge. Developing AI-driven solutions requires significant investment, but there is no guarantee that customers will adopt or pay for these features at a level that offsets rising development, infrastructure, and compliance costs. If AI features become expected rather than differentiated, Adobe may be forced to invest more simply to maintain its position, with limited incremental returns.

Cybersecurity is a meaningful risk for Adobe because the company sits at the center of vast amounts of sensitive data and deeply embedded workflows across millions of individuals, businesses, and large enterprises. Adobe’s products collect, store, and process creative assets, documents, customer data, marketing data, and enterprise workflows, making its systems an attractive target for cyberattacks. One reason this risk is elevated is scale. Adobe’s solutions are used globally and are often embedded directly into customers’ content supply chains and business operations. If a security incident were to occur in one of Adobe’s core platforms, it could potentially affect a very large number of customers at the same time. This creates the risk of large, concentrated events rather than isolated incidents, which can amplify financial, legal, and reputational consequences. Adobe also operates primarily through cloud-based and hosted solutions, which increases its exposure to cybersecurity threats. As more functionality, data storage, and collaboration move into the cloud, the attack surface naturally expands. Cyber threats can come from many directions, including external attackers, insiders, compromised credentials, vulnerabilities in third-party software, or simple human error. The increasing complexity of Adobe’s systems makes it harder to identify and defend against every potential weakness. Another important factor is Adobe’s reliance on third-party components and service providers. Some Adobe solutions include open-source software or integrate with external systems. Vulnerabilities in these components can be exploited even if Adobe’s own security practices are strong. In addition, Adobe depends on third-party vendors for infrastructure and services, meaning a breach at a partner could still impact Adobe’s customers and reputation. The nature of Adobe’s customer base also raises the stakes. Many enterprise customers rely on Adobe for mission-critical workflows involving sensitive documents, customer data, and brand assets. A security failure could lead customers to pause deployments, delay renewals, or reconsider long-term contracts. Even if the financial impact of a breach is manageable, loss of trust can be difficult to repair, particularly with large organizations that place a high value on security and compliance. Finally, cybersecurity risk continues to grow as technology evolves and geopolitical tensions increase. More sophisticated attackers, including state-sponsored groups, are targeting large technology platforms. At the same time, customers and regulators have rising expectations around data protection, transparency, and incident response. Any perception that Adobe’s security controls are inadequate or slow to respond could harm its brand and customer confidence.

Reasons to invest

Innovations is a reason to invest in Adobe because the company is not simply adding new features to existing products, but systematically expanding its role across the entire content lifecycle, from creation and productivity to marketing execution and measurable business outcomes. Adobe’s innovation strategy is broad, integrated, and clearly monetizable, which is what makes it compelling from an investment perspective. At the core of this innovation is Adobe’s ability to serve multiple large and growing customer groups with tailored solutions. For business professionals and consumers, Adobe is transforming everyday productivity tools like Reader, Acrobat, and Express into intelligent, conversational applications. By offering freemium, AI-driven experiences that span documents, presentations, and visual content, Adobe can reach billions of users globally. These products lower the barrier to entry, increase engagement, and create natural pathways toward paid plans as users rely more on advanced functionality. A key strength of Adobe’s innovation is that it is designed to be monetized. The introduction of generative credits creates a clear and scalable pricing mechanism tied directly to usage and value. As customers consume more credits across more apps, media types, workflows, and models, they naturally move to higher-tier plans or purchase add-ons. The rapid growth in credit consumption indicates that these features are being used in meaningful, day-to-day workflows rather than as experimental tools. Adobe’s innovation is especially powerful in marketing and enterprise use cases, where the company offers something few others can match: a unified platform that connects content creation, data, distribution, and measurement. Adobe Experience Platform serves as the foundation for customer engagement at scale, enabling real-time personalization and insight generation. Tools such as GenStudio, Experience Manager, and agentic web solutions allow marketers to produce more content, adapt it faster, and directly link creative output to traffic, conversion, and return on investment. This ability to close the loop from creation to commerce is a major differentiator and supports higher enterprise spending. Innovation is also expanding Adobe’s addressable market within existing customers. Solutions like Firefly Services and Firefly Foundry allow enterprises and media companies to train models on their own content, brands, and intellectual property. This enables faster and more consistent content production while maintaining brand control. These offerings can materially increase customer spend, as Adobe moves from selling individual tools to providing managed, AI-driven content infrastructure for entire organizations or franchises. What makes Adobe’s innovation particularly attractive is that it builds on existing strengths rather than replacing them. New capabilities are layered onto a large installed base, trusted workflows, and strong distribution channels. This allows Adobe to invest heavily in innovation while maintaining strong margins and cash generation. The result is not just faster product development, but deeper customer relationships and higher lifetime value.

Acquisitions and partnerships is a reason to invest in Adobe because the company uses them in a disciplined and strategic way to extend its platform, enter new growth areas, and deepen its relevance to customers without disrupting its core business. Rather than pursuing large, risky deals, Adobe focuses on acquiring and partnering with companies that add clear capabilities to its ecosystem and can be monetized through its existing distribution and customer base. The acquisition of Semrush is a good example of this approach. Brand visibility is becoming one of the most important challenges for marketers, especially as discovery shifts beyond traditional search engines toward AI-driven search, LLMs, and agentic interfaces. Semrush brings deep expertise, data, and trusted tools in search engine optimization and generative engine optimization, with an established customer base that includes some of the world’s largest brands. By integrating Semrush into Adobe’s Experience Platform, Analytics, Experience Manager, and LLM Optimizer, Adobe can offer a more complete solution that helps marketers understand what customers are searching or prompting for, shape how brands appear across owned channels, search engines, and LLMs, and measure the results end to end. From an investment perspective, the structure of the Semrush transaction also matters. The deal is relatively small compared to Adobe’s scale, is funded with cash, and is expected to have a negligible earnings impact in the first year and become accretive thereafter. This reflects Adobe’s focus on value creation rather than growth for growth’s sake. The acquisition expands Adobe’s addressable market in marketing technology while fitting naturally into its existing enterprise workflows. Partnerships play an equally important role in Adobe’s strategy. Adobe has consistently positioned itself to work across leading technology ecosystems rather than trying to lock customers into a closed system. Integrations and partnerships with platforms such as AWS, Azure, Google, OpenAI, Microsoft Copilot, and others allow Adobe’s tools and APIs to be used wherever customers are already working. This expands Adobe’s reach, creates new top-of-funnel entry points, and increases the likelihood that users eventually convert into paid Adobe customers. These partnerships also reflect Adobe’s strength in providing underlying infrastructure rather than just end-user applications. As conversational and agentic interfaces evolve, Adobe’s APIs for imaging, video, document processing, and productivity become more valuable. By making these capabilities available through external platforms and LLMs, Adobe can monetize usage in new contexts while reinforcing its role as a foundational layer for creativity and productivity. Importantly, Adobe’s acquisition and partnership strategy reinforces its long-term moat. New capabilities are integrated into an existing ecosystem with strong customer relationships, high switching costs, and proven monetization models. This allows Adobe to scale new offerings faster and at lower risk than standalone competitors.

User adoption is a reason to invest in Adobe because the company is growing its customer base at multiple entry points while maintaining a clear path from usage to paid subscriptions. Adobe is not dependent on a single product or customer segment. Instead, it builds a broad funnel that starts with free or low-cost tools and expands into higher-value subscriptions and enterprise relationships over time. Among business professionals and consumers, Adobe is seeing strong growth in everyday productivity tools that reach very large audiences. Acrobat Web grew monthly active users by more than 30% year over year, showing that Adobe remains deeply embedded in document workflows. Adobe Express is gaining traction in education, with rapid growth in student access, which is important because it introduces Adobe tools early in users’ careers. As these users enter the workforce, Adobe is well positioned to convert familiarity into paid usage. The growing Express partner ecosystem and the rising number of first-time business purchases show that adoption is accelerating beyond Adobe’s traditional creative base. In the creator and creative professional segment, Adobe is successfully attracting the next generation of creators while keeping its core professional users engaged. Freemium products such as Firefly, Express, and Premiere Mobile now reach more than 70 million monthly active users, growing over 35% year over year. This indicates that Adobe is meeting creators where they are, including on mobile and simpler workflows, without giving up its professional strengths. Importantly, this growing usage is starting to translate into revenue. Firefly plays a central role in this conversion. It acts as an entry point for new users and an expansion tool for existing Creative Cloud customers. Strong growth in first-time Firefly subscriptions and rapidly rising generative credit usage show that users are incorporating these tools into their daily work, not just testing them. As usage increases across more tools and workflows, customers naturally move to higher-tier plans or purchase add-ons. Enterprise adoption adds another important growth driver. Adobe continues to win large customers across many industries, including global brands, banks, retailers, governments, and media companies. Products such as Firefly Services, Firefly Foundry, GenStudio, and Brand Concierge help these customers create, manage, and personalize content at scale. As a result, Adobe is not only adding more users within large organizations, but also increasing how much each customer spends by becoming more deeply embedded in their workflows. In marketing and customer experience, Adobe is benefiting from companies wanting fewer, more integrated platforms. Growth in Adobe Experience Platform, GenStudio, and newer agent-based tools shows that enterprises are choosing Adobe to manage content, customer data, and engagement in one place. Strong subscription growth, rising demand outside the U.S., and repeated recognition from industry analysts suggest that Adobe is gaining market share, not just growing alongside the market.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 16,70, which is from fiscal year 2025. I have selected a projected future EPS growth rate of 11% (Finbox expects EPS to grow by 10,9% per year over the next five years, but 15% is the highest number I use. Additionally, I have chosen a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on the fact that Adobe has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $257,86. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Adobe at a price of $128,93 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 10.030, and capital expenditures were 179. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 125 in our calculations. The tax provision was 1.604. We have 418,6 outstanding shares. Hence, the calculation will be as follows: (10.030 – 125 + 1.604) / 418,6 x 10 = $274,94 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Adobe's free cash flow per share at $22,93 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $301,85.

Conclusion

I believe Adobe is an intriguing company with strong management that has built a durable moat through a combination of brand strength, high switching costs, deep enterprise entrenchment, and network effects. The company has consistently generated a high ROIC, which has increased in most years over the past decade and reached its highest level in fiscal year 2025. Adobe also continues to deliver strong free cash flow with consistently high margins, achieving record free cash flow in fiscal year 2025, reflecting the strength of its capital-light business model. Competition is a risk for Adobe because it operates in fast-moving and crowded markets where lower-priced, simpler, or bundled alternatives can attract users, particularly at the entry level. While Adobe remains strong among professionals and enterprises, competitors such as Canva and broad productivity platforms can pressure pricing, slow user conversion, and increase churn among students, freelancers, and small businesses over time. The AI paradox is another risk, as AI makes content creation faster and easier, which can reduce the need for complex, high-priced professional tools. As “good enough” AI output becomes more widely available and workflows shift toward model-driven creation, Adobe may face pressure on its addressable market and pricing unless it can clearly capture and monetize the added value created by AI. Cybersecurity also remains a risk because Adobe manages large volumes of sensitive data and supports mission-critical workflows for millions of users and enterprises, making it an attractive target for attacks. A serious breach could impact many customers at once, damage trust, and lead to financial, legal, and reputational consequences, particularly given Adobe’s reliance on cloud infrastructure and third-party systems. Innovation is a key reason to invest in Adobe, as the company is expanding beyond individual tools into an integrated, end-to-end platform spanning creation, productivity, and marketing with clear paths to monetization. By layering new capabilities onto a large existing user base and linking usage to higher-value plans and enterprise spending, Adobe turns innovation into durable growth, strong margins, and higher customer lifetime value. Acquisitions and partnerships further strengthen the investment case, as Adobe uses them in a disciplined way to expand its platform and enter new growth areas while building on its existing ecosystem. By integrating complementary acquisitions such as Semrush and embedding its capabilities across major technology platforms, Adobe increases its reach, strengthens customer lock-in, and creates new, relatively low-risk monetization opportunities. User adoption is another reason to invest, as Adobe continues to expand its user base across consumers, creators, and enterprises while steadily converting usage into recurring revenue through freemium entry points and integrated platforms that scale into higher-value subscriptions. While there are still uncertainties around how AI will ultimately reshape parts of Adobe’s business, I believe that initiating a small position at a Ten Cap price of $274 could represent an attractive long-term investment.

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