Adobe (NASDAQ:ADBE) posted record revenue in its fiscal third quarter, raised its full-year targets, and crossed 1 billion monthly active users. The stock shrugged. It now trades at less than 10 times expected earnings, a multiple usually reserved for businesses in decline.
That’s an odd price tag for a company that would easily rank among the 10 Best Return on Equity (ROE) Stocks to Buy given its operating efficiency, yet it is still growing revenue by double digits. Adobe sells subscription software: Photoshop, Premiere, and Illustrator for creative pros, Acrobat for anyone who has ever signed a PDF, and marketing tools for big brands through Experience Cloud.
So which is wrong, the price or the business? The answer hinges less on this year’s results than on whether generative AI turns Adobe’s toolbox into a commodity.
Hard to Walk Away From
Adobe’s edge has always been workflow lock-in. Professionals train on its tools for years, and agencies build whole pipelines around its file formats. Ripping that out means retraining people and rebuilding processes.
The proof still shows up in the numbers. Total annualized recurring revenue (ARR, the yearly value of active subscriptions) ended fiscal Q3 at $27.50 billion. Creative & Marketing Professionals subscription revenue rose 13% to $4.65 billion, while the Business Professionals & Consumers group, home of Acrobat, grew faster at 16% to $1.91 billion.
Pricing power hasn’t vanished either. Adobe expects a non-GAAP operating margin of about 45% for fiscal 2026, a level few software companies reach. That profit cushion funds its fight against nimbler rivals, a competitive battle explored further in our coverage of how Adobe Is Inviting Figma Users to Test a New AI Design Tool.
AI Is Bringing Users In
Adobe’s answer to AI disruption is to build it into its own products. AI-first ARR grew more than 150% year over year in fiscal Q3, and the company passed the billion-user mark across its creativity and productivity apps.
Management is also leaning into a freemium strategy, using free entry points to pull in users it can upsell later. The financials held up anyway. Fiscal Q3 operating cash flow hit a record $2.52 billion, and non-GAAP EPS climbed to $6.13 from $5.31 a year earlier. Turning free users into paying ones is the same race facing other Best AI Stocks to Buy in October.
Leadership is changing too. Anil Chakravarthy, who runs the customer-experience business and worldwide field operations, takes over as CEO later this year, with Shantanu Narayen moving to executive chair. A new boss inheriting a strategy shift adds execution risk.
Is Growth About to Stall?
Here’s the strongest bear case: forward-looking indicators are cooling faster than revenue. Adobe’s own full-year target calls for ending ARR growth of 10.2%, below the 13% revenue growth it posted in fiscal Q3. Remaining performance obligations (contracted revenue not yet recognized) slipped to $22.16 billion at the end of fiscal Q3 from $22.27 billion a quarter earlier.
The freemium push explains part of that. Free users don’t show up in ARR until they convert, and there’s no guarantee enough of them will. If AI tools let casual creators skip paid software altogether, the billion-user milestone could prove wider than it is deep. That’s the main reason the stock sits where it does.
A Price Built for Decline
At a forward P/E of 9.90, as of October 9, investors are paying under $10 for every $1 of expected earnings. That compares with a sector average of 23.35 and Adobe’s own five-year average of 24.95. Earnings, meanwhile, are expected to keep climbing, with EPS growth projected at 13.07% in 2028. A business compounding profits at a low-teens pace rarely carries a single-digit multiple unless the market expects that growth to dry up.
Buybacks add another lever. Adobe repurchased about 9.5 million shares in fiscal Q3, and its diluted share count fell to 395 million from 424 million a year earlier. At this valuation, each buyback dollar retires more stock, a heavy shareholder-return focus that echoes strategies seen among the 11 Best Agentic AI Stocks to Buy Right Now as companies deploy capital to defend their moats.
It also matters which earnings you trust. Fiscal Q3 GAAP EPS was $4.62, versus $6.13 on a non-GAAP basis, which excludes stock-based compensation. Hedge fund interest cooled, with 81 funds holding the stock in the most recent quarter, down from 86 in the prior one. Short interest stands at 5.30% of the float, a moderate level of bearish positioning rather than a crowded bet against the company.
Bending, Not Breaking
The evidence points to a business that is bending rather than breaking. Revenue, cash flow, and earnings are still rising, while the multiple already assumes a sharp slowdown that hasn’t shown up in the results. For patient investors who can stomach a messy leadership handoff, the setup looks unusually forgiving. ARR growth sliding into single digits while free users fail to convert would change that, and the low multiple would start to look earned.
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