Adobe's Solid Growth Masks Deep Regulatory and AI Risks

What happened

Adobe reported another quarter of solid revenue growth, as highlighted in a recent Motley Fool article, which argues the company is dispelling AI disruption fears. However, the DeepValue master report reveals that Adobe's stock has fallen ~36% over the past year, driven primarily by market concerns over regulatory scrutiny and AI competition, not fundamental weakness. Key risks from the report include the ongoing DOJ/FTC ROSCA lawsuit, which could result in fines, mandated changes to subscription practices, and higher churn, alongside rapid commoditization of AI features in creative software threatening Adobe's pricing power. Despite these headwinds, Adobe maintains strong fundamentals with 95%+ subscription revenue, robust free cash flow, and a net cash balance sheet, supported by ~$20-21 billion in remaining performance obligation (RPO) for revenue visibility. The current valuation at a modest ~11% discount to DCF intrinsic value suggests the market is pricing in significant uncertainty, but investors must weigh this against the non-trivial tail risks from legal and competitive pressures.

Implication

For investors, Adobe offers a high-quality franchise with durable subscription revenue and cash generation, but the DOJ/FTC lawsuit introduces a significant, unquantifiable downside risk that could lead to fines or operational changes affecting customer loyalty. Successful AI monetization through Firefly and Sensei GenAI may drive future growth and justify a higher multiple, yet failure here or adverse regulatory outcomes could erode pricing power and competitive positioning. The current stock price reflects a de-rated valuation due to these fears, providing a modest margin of safety but not enough for risk-averse investors given the potential for sudden negative catalysts. Monitoring quarterly subscription growth, RPO trends, and legal developments will be crucial to determine if the decline presents a buying opportunity or a value trap. Ultimately, Adobe remains a potential buy only for those comfortable with the overhang, as the thesis hinges on execution amid heightened uncertainty.

Thesis delta

The new article reinforces Adobe's continued revenue growth, supporting the bull case for business resilience against AI disruption. However, it overlooks the critical regulatory and competitive risks detailed in the DeepValue report, so the overall investment thesis remains unchanged: Adobe is a potential buy with significant caveats, requiring close watch on legal outcomes and AI monetization.