Adobe Inc. (NASDAQ:ADBE) reports its fiscal third-quarter results on September 10. RBC Capital believes that the company’s path toward company-specific multiple expansion depends on ARR re-acceleration. On September 2, analyst Matthew Swanson raised the price target on the stock to $315.00 (from $285.00) while maintaining an Outperform rating.
The firm explicitly attributed the price increase to peer multiple expansion rather than any changes that he expects in Adobe’s report itself. In fact, the firm expects Adobe to report results “in-line” with expectations rather than delivering any major earnings surprise.
AI Adoption Exists
Adobe has demonstrated healthy financial performance for its second-quarter. Revenue reached a record $6.62 billion, a 13% year-over-year increase that beat Wall-Street expectations.
The company exited the quarter with an Annualized Recurring Revenue of $27.10 billion. This figure is particularly important for its AI thesis, considering how its AI-first ARR tripled year-over-year and exceeded $500 million.
The company has noted that it prioritizes user adoption and freemium AI growth over short-term ARR, a strategy that is helping the company in faster user acquisition and greater lifetime value.
According to RBC Capital, investors will therefore be focused on the updated pricing and go-to-market strategy around increased freemium utilization. There were also expected potential announcements of a new CEO, CFO or both as per the analyst note. A day later, Adobe named Anil Chakravarthy as its next president and CEO, succeeding Shantanu Narayen.
To top this bull case, software multiples across the SaaS group have been recovering post the SaaSpocalypse, with the firm attributing Adobe’s own recent stock performance to improving sector-sentiment.
Adobe Still Needs ARR Re-acceleration
RBC Capital noted that while Adobe has benefitted from peer multiple expansion, its own path toward company-specific multiple expansion lies in something that hasn’t happened yet: ARR- reacceleration.
While the company did reach an ARR of $27 billion in Q2, management noted that it expects fiscal 2026 ending ARR growth of about 10.2% year-over-year. A sector-wide re-rating can therefore reverse just as quickly as it had arrived if Adobe fails to deliver.
Another variable adding uncertainty to the setup is leadership. The company is undergoing a leadership transition with CEO Shantanu Narayen stepping down on December 1 and transitioning to Executive Chair. CFO Dan Durn, meanwhile, left for Marvell Tech on June 15.
A leadership change along with in-line results can easily overshadow the freemium and pricing strategy story for Adobe.
What Hedge Funds are Saying
Recent Q2 filings from Insider Monkey show substantial interest and exposure toward Adobe. Arrowstreet Capital held an estimated 6.79 million shares, down 1%. AQR Capital reduced its stake by 8%, while Harris Associates increased its position by 24%.
81 hedge funds held positions in the stock at the end of the second quarter, modestly down from 86 in the previous quarter.
Overall, RBC Capital’s note reflects confidence in the company’s overall position as software valuations recover. However, the firm will still be looking out for ARR reacceleration on September 10 for multiple expansion.
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