On August 31, Adobe (NASDAQ:ADBE) committed more than $4 billion to giving away its AI tools. The company will offer 12 months of free access to its Firefly Standard subscription and Adobe Express Premium features to more than 27 million eligible citizens and residents in Saudi Arabia, expanding its partnership with the country’s Ministry of Communications and Information Technology and the government-backed AI firm Humain. The deal includes a new image generation model tuned for Saudi culture, letting users create images from Arabic-language prompts. It is a striking bet for a stock that trades like the market expects its growth to stall.
A Business Where AI Is Adding, Not Subtracting
That confidence has some backing. Adobe’s AI-first products, the newer tools built around generative features, saw their annualized recurring revenue triple year over year to more than $500 million, evidence that artificial intelligence is adding to Adobe’s business rather than just threatening it. The Saudi Arabia expansion extends that momentum internationally, giving Firefly and Express a built-in user base of millions who might otherwise never try Adobe’s software, in a region where Humain and the country’s sovereign wealth fund are pouring money into localized AI development.
The core business is not showing cracks either. Adobe’s most recent quarter delivered $6.62 billion in revenue, up 13% year over year and a company record, extending two years of consistent low double-digit growth. Subscriptions make up virtually all of that revenue, and Adobe closed the quarter holding $27.1 billion of annualized recurring revenue, plus another $22.3 billion in contracted revenue still to be recognized, a backlog that gives management visibility most software companies would envy. Net margin for fiscal 2025 came in near 30%, and free cash flow neared $9.9 billion for the year, funding both new deals like the Semrush acquisition and buybacks that retired about 2% of shares outstanding in just three months.
A Valuation That Still Smells Doubt
Yet the stock’s roughly 10 times forward earnings multiple says the market is not convinced the good times continue. The fear is straightforward: generative AI now lets anyone produce images and design work without needing Photoshop expertise, a skill that used to be the whole point of buying Adobe’s software. Adobe faces that pressure not just from AI-focused startups but from Microsoft, and any regulatory shift like the European Union’s AI Act could raise compliance costs and complicate how Adobe trains its own models.
There are cracks worth watching inside the numbers too. Total annualized recurring revenue growth is tracking near 10% for the fiscal year, well below the pace of reported revenue, and a good chunk of that comes from the roughly $480 million Semrush added rather than organic demand. Adobe also wrote down about $70 million in goodwill tied to its publishing and advertising business last quarter, and it is navigating leadership turnover at the top: the chief financial officer departed in June, replaced on an interim basis, while longtime CEO Shantanu Narayen has said he will step aside once the board finds a successor.
What The Market Is Signaling
Hedge fund enthusiasm has cooled recently. The number of funds holding Adobe fell from 86 to 81 in the most recent quarter, suggesting some institutional investors are trimming rather than adding. Short interest sits at 5.06% of the float, enough to indicate a real bear camp has formed around the stock. Adobe’s forward price-to-earnings ratio of 10.57, as of August 31, remains low for a company still growing revenue in the double digits.
Where The Evidence Leaves Investors
Adobe is making a multibillion-dollar wager that AI expands its business rather than replaces it, and the Saudi Arabia deal is the clearest example yet of that strategy in action. The tension sits between a market multiple already pricing in decline and a recurring revenue engine that keeps setting records. Bulls are counting on free users in Saudi Arabia and elsewhere eventually converting into paying Firefly and Express subscribers.
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