Adobe's AI Monetization Test Amid Skepticism and Low Valuation

What happened

Adobe's stock has dropped nearly 50% over the past year due to fears that generative AI competitors could disrupt its creative software dominance, leading to historically low valuation multiples. However, the company maintains solid fundamentals with FY2025 revenue growth of 11% and strong cash flow, as highlighted in a Seeking Alpha article arguing investors are wrong to dismiss the stock. The DeepValue master report notes Adobe is in a 'show-me' regime where AI features must convert into measurable monetization, not just usage, to rebuild investor confidence. A critical test is unfolding as renewals for Creative Cloud Pro, priced higher to capture AI value, roll out, revealing customer price elasticity and potential downgrades. The narrative centers on whether Adobe can provide clear, quantified KPIs on AI-influenced ARR to justify a rerating beyond its current depressed levels.

Implication

Short-term, Adobe's stock may remain volatile until renewal outcomes provide evidence that AI packaging drives ARPU lift without increasing churn, as the market demands proof over promises. If successful, the base case implies a rerating toward $290, supported by sustained 10% ARR growth and aggressive share repurchases under a $25 billion authorization. However, failure to quantify AI contributions or a surge in downgrades to cheaper tiers could trigger the bear case, pushing the stock toward $200 and reflecting eroded pricing power. Adobe's strong cash flow and buybacks offer downside support but do not replace the need for growth, making capital allocation discipline a secondary concern. Ultimately, investors must balance the attractive valuation against execution risks, with a focus on the next two quarters for decisive signals on AI monetization success or failure.

Thesis delta

The Seeking Alpha article reinforces the view that Adobe is undervalued due to overstated GenAI fears, but it does not alter the core investment thesis from the DeepValue report. The thesis remains that Adobe's rerating hinges on demonstrable AI monetization through tier migrations and standalone plans, with the next 6-9 months serving as a critical proof period. No shift occurs; instead, the article's optimism is tempered by the report's emphasis on disclosure risks and competitive pressures, underscoring the need for tangible evidence over narrative.