Adobe's AI-Driven Growth Confronts Persistent Regulatory and Valuation Risks

What happened

Adobe delivered strong Q4/FY25 results with double-digit growth and robust AI product momentum, including a tripling of generative credit consumption and Firefly adoption acceleration, as reported in a recent Seeking Alpha article. However, the DeepValue master report indicates that Adobe's shares trade at a ~13% premium to its DCF intrinsic value estimate of ~$315, offering limited margin of safety amid elevated risks. Key overhangs include the ongoing FTC/DOJ ROSCA lawsuit over subscription practices, which could lead to significant penalties or structural changes, and capital allocation missteps like the Figma break fee and the planned Semrush acquisition. Despite management's optimistic FY26 guidance for up to 9.8% revenue growth and 12.3% Non-GAAP EPS growth, these regulatory and competitive threats inject uncertainty into long-term economics. Thus, while the business demonstrates resilience and AI traction, the investment case remains clouded by unresolved legal issues and valuation concerns.

Implication

The accelerated AI adoption and strong guidance underscore Adobe's ability to innovate and capture growth, potentially justifying higher multiples if sustained without disruptions. However, the FTC/DOJ litigation poses a material threat that could result in fines or mandated subscription changes, directly impacting profitability and moat durability. Valuation remains a headwind, with the stock priced above intrinsic value, suggesting limited near-term upside without a correction or risk resolution. Capital allocation risks, such as the Semrush deal, add execution uncertainty that could dilute returns or distract from core operations. Therefore, while the franchise is high-quality, investors should await clarity on regulatory outcomes and a more attractive entry point before increasing exposure.

Thesis delta

The positive earnings report and AI momentum reinforce Adobe's growth narrative but do not mitigate the core risks of regulatory action and overvaluation highlighted in the DeepValue report. This maintains the existing cautious 'WAIT' stance, with no fundamental shift in the investment thesis requiring an upgrade to a more bullish view.