Adobe’s AI-Driven ARR Grows as Share Price Slides, Deepening the Valuation Discount

What happened

Adobe’s share price has fallen roughly 36% over the past year even as management leans on rising AI-driven annualized recurring revenue and has raised its 2025 outlook. The Zacks piece frames the selloff as a product of heightened competitive anxiety and valuation pressure, despite Adobe’s updated guidance and solid subscription fundamentals. DeepValue’s latest work shows Adobe exiting Q3 FY2025 with about $20.4 billion in remaining performance obligations, 95% subscription revenue mix, and strong cash generation, reinforcing the durability behind that guidance. Embedded Firefly and GenStudio capabilities across Creative and Experience Clouds appear to be translating into higher ARPU and stickier workflows, but investors remain concerned about Canva/Figma pressure and lower-priced PDF alternatives. Regulatory overhang around DOJ/FTC actions on subscription practices continues to cloud sentiment, leaving a business with visible AI-boosted growth trading at a multiple (≈20x P/E) below its DCF-based intrinsic value anchor.

Implication

For investors, the key tension is that fundamentals—rising AI-driven ARR, upgraded 2025 guidance, strong RPO, and robust free cash flow—are improving while the stock has de-rated sharply on competitive and regulatory fears. This widens the apparent valuation gap versus intrinsic value estimates, potentially improving the long-term risk/reward for patient holders and new entrants. However, the market’s skepticism is not baseless: Adobe must demonstrate that Firefly/GenStudio can drive sustained ARPU and seat growth in the face of Figma, Canva/Affinity, and low-cost document competitors. Investors should track quarterly Digital Media ARR growth, AI feature adoption/usage, RPO and deferred revenue trends, and any concrete developments in DOJ/FTC subscription-practices cases as key thesis signposts. Position sizing should reflect that while downside appears cushioned by recurring revenue and a net-cash balance sheet, sentiment could remain volatile until either AI monetization clearly reaccelerates growth or regulatory risk is resolved on manageable terms.

Thesis delta

The new article reinforces rather than undermines the existing BUY thesis by highlighting that Adobe’s AI-driven ARR and upgraded 2025 guidance are not being fully reflected in a stock that is down ~36% over the year. We see no fundamental deterioration versus the DeepValue master report; if anything, the de-rating and continued execution marginally increase the margin of safety, though execution on AI upsell and competitive dynamics remain critical watch items. Accordingly, our stance stays BUY, with an emphasis on closely monitoring Digital Media ARR reacceleration and any adverse regulatory outcomes that could structurally alter subscription economics.