Adobe: results keep improving, the multiple keeps falling

The core tension

Adobe’s reported numbers and its share price are telling two different stories, and that gap is the question this note has to resolve.

• The numbers. Q2 FY2026 revenue of $6.62bn, up 13% year-on-year and a record; subscriptions up 13%; AI-first ARR more than tripled year-on-year to exceed $500m; FY2026 guidance raised to $26.5bn–$26.6bn revenue and $24.35–$24.45 non-GAAP EPS. Growth is accelerating, not decaying. Confirmed
• The price. Down roughly 60% from the 2024 peak at the April 2026 low; forward P/E compressed to around 9x against a five-year average near 40x.
• The DCF. The base case implies roughly $394 per share, a 78% premium to the $221 close on 7 July 2026; even a stressed scenario (margin cut 500bp for AI inference costs, WACC pushed to 11%) implies around $311 — still above the current price. Carried forward

Read plainly: nothing in the disclosed data yet confirms the bear thesis. The market is pricing in something more severe than any of the scenarios modelled — closer to an assumption of outright future revenue decline or margin collapse, not just slower growth. Whether that is justified is the fork this note takes a position on.

Bear case

1. Four compounding structural risks, not yet visible but plausible: seat compression (AI raises designer productivity, reducing seats needed), disintermediation (Canva- and Sora-style tools let casual users skip professional tools), margin compression (AI compute costs eroding the ~45–47% operating margin), and a valuation de-rating that may persist rather than fully reverse. Speculation
2. Two credible whole-segment attackers. Canva: $4bn ARR growing ~35%, now doubling its B2B (25+ seat) business to $500m ARR — moving upmarket into Adobe’s enterprise territory — and winning the “ask an LLM for a design” referral funnel (a top-10 referred domain from ChatGPT). Apple’s Creator Studio undercuts Creative Cloud pricing by around five times and is iterating fast (Pixelmator integration deepened just six months post-launch).
3. Leadership vacuum at the worst possible moment. Both CEO (Narayen’s transition announced March 2026) and CFO (Durn departed June 2026) posts are open, with the incoming CEO inheriting a strategy — buyback, Nvidia partnership, open-model pivot — pre-committed on the way out: a genuine fork between continuity and repricing or restructuring.
4. AI monetisation is small relative to the base. AI-first ARR, while tripling, is still around 2% of the ~$27bn ARR base — the “usage without monetisation” critique has not fully gone away.
5. Figma remains a credible long-term threat to the design/UI wing specifically, despite its own post-IPO stock discount; BofA explicitly prefers Figma over Adobe as the AI-era design platform.

Bull case

1. Fundamentals contradict the disintermediation narrative, so far. No measurable Creative Cloud churn attributable to Apple’s Creator Studio six months post-launch; subscription revenue still growing at a double-digit rate. Confirmed
2. The “workflow platform” pivot looks vindicated by 2026 events. OpenAI shut down Sora on standalone economics (compute cost far exceeding lifetime revenue); Runway — the strongest AI-native video company — chose to distribute through Adobe rather than compete head-on; Figma’s own gross margin fell from 92% to 82% absorbing inference costs, showing that running models is expensive for challengers too, not only for Adobe. Model quality alone is not monetising; workflow, rights management and enterprise distribution are what is holding value.
3. Revenue is less seat-dependent than the bear case assumes. Document Cloud (volume), Digital Experience (platform/consumption), generative credits and Firefly Services (API usage) are not per-seat. Early evidence of seat compression is absent from Adobe’s own numbers.
4. Valuation has been driven down further than fundamentals justify. The ~9x forward P/E is a historic low for Adobe; a $25bn buyback authorisation (through 2030) is management’s clearest signal that it sees the stock as mispriced.
5. M&A optionality remains for capability tuck-ins. Semrush and Topaz Labs both cleared regulatory review quickly in 2026, showing Adobe can still buy growth adjacently even though defensive mega-M&A of the Figma kind is closed off.

Base case

The most likely near-term path, absent a clear catalyst either way:

• Growth continues in the low-to-mid teens, part organic and part price/bundling — FY2026E growth of around 11.5% includes roughly 1.2 points from the Semrush acquisition, putting organic growth ex-Semrush closer to 10%. Speculation
• Operating margin drifts modestly lower (47% toward a ~45% non-GAAP glidepath) as AI compute costs are absorbed, but does not collapse — Adobe’s scale and pricing power give it more room to absorb inference costs than a challenger such as Figma. Speculation
• Creative Cloud pricing power is contested at the prosumer tier (Apple, Canva) but intact at the professional/enterprise tier, where no substitute yet matches Photoshop/Illustrator/InDesign-level depth.
• CEO succession is the single biggest near-term swing factor: an internal hire likely extends the current strategy; an external hire could mean repricing or restructuring Creative Cloud — a genuinely two-sided catalyst.

Key risks to monitor

Key catalysts to monitor

• CEO appointment — binary, could re-rate the stock in either direction.
• Apple/Canva subscriber or churn disclosures — first hard evidence for or against disintermediation.
• Q3 FY2026 earnings (around September 2026) — next read on organic growth ex-Semrush and margin trajectory.
• Gemini Omni adoption data — tests whether the workflow layer (Adobe’s moat) or the model layer is what is actually contested.
• Topaz Labs close (H2 2026) — another data point on whether regulators keep permitting tuck-in M&A.

Bottom line

The evidence available as of July 2026 favours the bull case more than the bear case: growth is accelerating, the “distribute rivals’ models” strategy has been validated by Sora’s shutdown and Runway’s choice to partner, and the DCF suggests meaningful upside even under a fairly severe margin-stress scenario. The bear case is a forward-looking prediction — seat compression and disintermediation could show up in the numbers — but has not yet. Speculation

The key question is less whether Adobe survives AI disruption — current evidence says yes, on the workflow-platform thesis — and more how much near-term volatility around the CEO transition an investor is willing to hold through to capture the valuation gap. That is a risk-tolerance question the numbers alone cannot answer.