Adobe's AI-Driven Growth Story Grapples with Persistent Valuation and Regulatory Risks

What happened

A Seeking Alpha article highlights Adobe's robust FY2025 performance, with ~10% revenue growth, near-90% gross margins, and 28% net income increase, suggesting undervaluation given a forward P/E 38% below peers. However, DeepValue's analysis indicates Adobe's current share price of $355.86 remains ~13% above intrinsic value based on a DCF model, reflecting no clear margin of safety despite a 29% five-year decline. The article touts a strategic AI partnership with Alphabet, integrating multi-model AI to fuel over $5 billion in AI-influenced ARR and support future growth. Yet, critical risks from DeepValue include ongoing DOJ/FTC litigation over subscription practices, competitive pressures from Figma, and regulatory scrutiny that could undermine the subscription model's economics. Ultimately, while AI initiatives offer growth potential, the stock's appeal is tempered by overvaluation and unresolved legal overhangs, aligning with a 'WAIT' stance.

Implication

In the short term, the AI partnership may provide a sentiment boost, but without resolving the DOJ/FTC case, upside is limited by legal risks. Medium-term, if growth slows or regulatory outcomes are adverse, the stock could de-rate further, potentially falling toward the $315 DCF anchor. Long-term, Adobe's entrenched moat and AI monetization could drive value, but current levels lack sufficient downside protection. Monitoring key indicators—such as quarterly revenue growth, RPO trends, and legal developments—is essential for timing any investment. A more attractive entry point or clearer regulatory resolution is needed before shifting from a 'WAIT' to a 'BUY' recommendation.

Thesis delta

The Seeking Alpha article emphasizes Adobe's strong fundamentals and AI growth, but this does not shift the core thesis from DeepValue. The thesis remains unchanged: Adobe is a high-quality franchise trading above intrinsic value with significant regulatory and competitive risks, warranting a 'WAIT' stance. No actionable shift is indicated unless the stock price drops meaningfully or legal clarity emerges.