Adobe Faces AI Skepticism but Buybacks Offer Cushion

What happened

Adobe's stock has been hammered by market concerns over AI disruption and flagging growth, as highlighted in the Seeking Alpha article. Despite this, the company maintains stellar fundamentals with 96% subscription revenue and $10.03B in operating cash flow from FY2025. The DeepValue report underscores a critical juncture: Adobe must prove its AI monetization, via Firefly tiers and Creative Cloud repricing, can sustain FY2026 targets of 10.2% ARR growth and ~45% margins. Key risks include potential margin erosion from rising AI inferencing costs and increased promotional activity to defend market share. If Adobe navigates these challenges successfully, its discounted valuation could re-rate as AI fears subside.

Implication

Adobe's aggressive share buybacks, which exceeded operating cash flow in FY2025, provide near-term EPS support but reduce financial flexibility if AI monetization lags. The stock's current valuation at 15.2x PE reflects significant skepticism, offering a margin of safety if the company meets its 10.2% ARR growth target. However, failure to achieve this could trigger the bear case scenario with an implied value of $200, driven by competitive pressure and margin compression. Success in scaling Firefly monetization and containing costs could lift shares towards the base case $310 or bull case $380. Therefore, position sizing should be cautious, emphasizing vigilance on execution metrics over the next two quarters.

Thesis delta

The Seeking Alpha article reinforces existing market narratives around AI risks without introducing new data that shifts the investment thesis. The DeepValue report's thesis remains unchanged: the call hinges on Adobe hitting its FY2026 ARR growth target while avoiding margin dilution from AI costs. Investors should maintain focus on upcoming quarterly confirmations, as any deviation from targets would necessitate a reassessment.