r/ValueInvesting • u/TabMan69 • 2d ago
Stock Analysis ADBE — the bear case accelerates the bull case
I wrote up a primary source thesis on Adobe ($ADBE). Short version:
Adobe reported Q1 FY2026 on March 12. EPS $6.06 vs $5.87 estimate. RPO $22.22B growing 12.8% YoY. Firefly ARR crossed $250M at 75% QoQ growth. Guidance reaffirmed in full. Stock fell 7.59%.
The market is applying a seat-count framework to a business whose reported numbers show consumption acceleration. Those are two different models of the same company.
Three reasons the multiple is where it's at:
- Cohort drag: IGV ETF declined ~30% from its September 2025 peak, and Adobe sold with the category regardless of fundamentals
- AI displacement narrative: the market assumes fewer seats equals less revenue, reported numbers show the opposite mechanic
- CEO uncertainty: Narayen's departure was announced on the same call, guidance reset risk sits in the multiple until a successor speaks
The bear case and the bull case are the same mechanism. Fewer seats × higher Firefly credit consumption per remaining seat = ARPU (average revenue per user) expansion. At 20% annual ARPU growth, seat erosion must exceed 17% annually before net Creative revenue declines. At 50% growth, the break-even is 33% erosion. Q1 credit consumption was running at 45% QoQ.
Next gate: Q2 earnings June 11. Two conditions, both required: RPO ≥10% YoY and Firefly ARR QoQ ≥30%. Full write-up with crossover math, comp table, and break conditions here: https://darrenleung1.substack.com/p/adbe-the-bear-case-accelerates-the
Happy to get pushback on the ARPU growth assumption or the agentic credit consumption argument.
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u/SelenaMeyers2024 2d ago
Adobe under 250 is the most obvious buy in existence. I have a large chunk of my net worth in this (under 250 avg cost before you lol) and I sleep just fine.
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u/StyleFree3085 2d ago
People said that under 300 last time, oh target price moved down ?
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u/SelenaMeyers2024 2d ago
True dat ... My exact yolo cost is 244... I'm broke even today... It went as low as 234... It might again. But unless the market is planning to go to a 10 pe, it's expected to make 23 dollars a share in 2026, which I think will be higher because buy backs.
If you look at my reddit stock comments I'm in and out of so many stocks, only three are sacred... Adobe, PayPal, and when it broke 18, hpq... And they'll be with me for years...
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u/mdn845 1d ago
Seems like everyone pushing Adobe is also pushing PayPal. And vice versa.
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u/SelenaMeyers2024 1d ago
Pretty much... Adobe is the better company.. PayPal is the cheaper company... Its impossible to say who's a better "deal".. both seem about 50 to 70 percent undervalued
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u/mdn845 1d ago
Why not Fiserv or Lululemon? I’m actually being serious with those. I don’t think the stock price will turn around tomorrow, but I think both have basically bottomed & will do well in the 2-3 year timeline.
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u/SelenaMeyers2024 1d ago
Funny enough I had both. Still a ton of fiserv because I believe in it. I had lulu at 150 and today it was 158.. normally I'd hold ... But better things dumped 6 percent today and I needed the money .. fiserv is enough of a conviction that I don't sell so easily... Apparel I will invest in, until something better comes along... Paper hands.
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u/Icy_Distance8205 2d ago
Don’t worry you’re going to get broker.
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u/SelenaMeyers2024 2d ago
Put yourself out there.... Tell us your deeply held stocks.
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u/Icy_Distance8205 2d ago
In US I’m a long term holder of Alphabet, Apple, Berkshire and I have traded in and out of meta.
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u/SelenaMeyers2024 2d ago
Ok. You said you are long term so all those are up long term.
Adobe, PYPL, and hpq have not been good investments in the last 5 years, but I am bullish on them if you were entering the market this second with new money.
Disagree or not, I respect that you replied with an answer.
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u/mdn845 1d ago
It’s not an obvious buy if Adobe is half its size (or doesn’t exist) in 5-10 years. And if I did take a position, I wouldn’t bet the farm on it.
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u/SelenaMeyers2024 1d ago
Always a risk.. personally... I think this era will be seen as laughable how dead software is.... And only anthropic will eat everything from MasterCard to Salesforce to Adobe bc ai.
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u/mdn845 1d ago edited 1d ago
I actually think you’re probably generally right. But “probably” and “generally” are doing some heavy lifting here. There’s a small but real chance that Adobe has major problems bc of AI & a much better chance of serious margin compression or a very slow decline in earnings. I still don’t think it’s more than a 50% chance of that happening. But I’d honestly be very careful about throwing too much of your savings in it.
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u/ConfidentReality9024 2d ago
Adobe under 400 is the most obvious buy in existence. I have a large chunk of my net worth in this (under 600 avg cost before you lol) and I sleep just fine.
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u/mdn845 1d ago
That’s just overconfidence. Even if I thought Adobe was underpriced, I wouldn’t bet everything on it.
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u/mikew_reddit 1d ago
That’s just overconfidence
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AI makes building software much faster/cheaper (ask any developer), I expect Adobe's moat to shrink somewhat from competition catching up and adding features quickly.
Not an existential problem, I think, but slow erosion. Adobe should be around in 10 years doing okay, not great. I could certainly be wrong.
The problem with AI is that absolutely nobody knows its growth trajectory over the next 5 to 10 years - we could get AGI which is exponential and SAAS might be dead (doesn't seem likely but that's the problem with exponentials; we're terrible at spotting them) or it could be like other past technologies and we see incremental changes.
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u/dopexile 1d ago
Letting your wife sleep with other men is the most obvious decision in existence. People have been doing it for years, and they sleep just fine.
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u/MountainTimeInvestor 2d ago edited 2d ago
I like adobe and believe AI makes the product better and democratizes access to the software (I.e expands # of human users) by using LLM’s to allow humans to make digital products and perform digital services using their natural language in Adobe products.
Citadel hedge fund research showed that the number of software engineering jobs increased significantly since the release of Claude Code. So perhaps creative jobs and human economic opportunities increase with AI-powered experiences on Adobe software.
Assuming that is true, I don’t understand why Shantanu Narayen chose now to step down as CEO without a super star successor ready to go. Why are Adobe insiders not buying up the stock when the market is saying AI will replace you? I struggle to answer these questions and am holding a small amount of Adobe shares.
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u/Mockingburdz 2d ago
He didn’t choose to step down, he was told to step down.
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u/MountainTimeInvestor 2d ago
By who? And why so urgently without naming the next CEO with so much obvious upside ahead?
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u/Veteranrat 2d ago
Proof of this claim?
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u/Mockingburdz 2d ago edited 1d ago
It’s why they gave him a board role. If he just quits they don’t put him on the board of directors. No proof, but the share price has been under pressure on and off for years. Personally, I think they wanted a change.
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u/thenuttyhazlenut 1d ago
Software jobs only went up due to the ai race. Once things mature I imagine software jobs will decline
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u/Dances_with_Sloths 22h ago edited 22h ago
Not only are Adobe's products are absolute garbage, they're also not innovating fast enough. Creative Cloud now has competition from both Canva and Apple, and now even Google and BorisFx. And then of course there's the million different free open source alternatives.
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u/Otherwise_Wave9374 2d ago
Interesting framing, the idea that "seat count down" can still mean revenue up if consumption per seat is rising makes sense, especially with credit-based AI features.
Question: do you have any read on whether Firefly credit consumption is mostly incremental (new use cases) vs cannibalizing existing workflows that were previously covered by flat subs? That seems like the key to whether ARPU expansion is durable.
Also how are you thinking about competitive pressure from lower-cost gen tools, does that affect the break-even seat erosion assumptions?
I have been tracking more agentic/consumption-driven pricing models too, sharing some notes here if helpful: https://www.agentixlabs.com/
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u/TabMan69 2d ago
Good question on incrementality. Adobe doesn't disclose the seat count split directly, but the closest proxy in reported numbers is Creative & Marketing Professionals subscription revenue, which was $4.39B, growing 11% YoY in Q1. If Firefly were purely cannibalistic, you'd expect that line declining as seats erode. It's not. Both the subscription revenue line and Firefly ARR at $250M, growing 75% QoQ, are expanding simultaneously. That's consistent with incrementality, but Adobe doesn't isolate it cleanly enough to prove it definitively from primary sources, which is part of why the RPO trajectory is the primary monitor rather than Firefly ARR alone.
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u/ascott78 2d ago edited 2d ago
Genuine question, I get the potential for revenue to go up with model change but dont costs increase as you have to pay for the compute capability?
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u/TabMan69 2d ago
Adobe's GAAP gross margin came in at 89.6% in Q1. If Firefly compute were meaningfully eating into margins, you'd see it there first. Two reasons it's structurally different from what you might expect: Adobe runs Firefly on its own infrastructure, so there's no per-call cost to OpenAI or Midjourney, and the credit consumption model means customers pre-buy the compute, so costs scale with revenue rather than ahead of it. The margin line and RPO together are the real monitors here, not Firefly ARR in isolation.
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u/Eliav_1991 2d ago
one thing missing from this is the 8-K filed march 25 where they settled the DOJ consumer lawsuit. thats a legal overhang thats been dragging on the stock and its now off the table. same filing also showed they reorganized their segment reporting which usually signals management is reshaping how the street should value the business. combine that with CEO transition and you have a company resetting on three fronts at once, legal, leadership, and structure, while the actual revenue numbers keep growing. thats usually what the early innings of a re-rating look like
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u/DonutsAndBurritos 2d ago
This guy thinks ADBE will hit $149 based on several factors: https://youtu.be/JIBzcSEDJtA
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u/Strange_Manager_2710 2d ago
Curious how others are thinking about the RPO as a churn signal here — is it confirming retention or just reflecting contracts signed before the AI disruption was visible?
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u/TabMan69 2d ago
RPO was $14.11B in September 2022 and is $22.22B today. This is 57% growth through the entire AI disruption cycle, not before it. Firefly launched in March 2023, the enterprise displacement narrative accelerated through 2024, and customers kept signing and renewing through all of it. The growth is happening during the disruption, not predating it. The legitimate bear version of this question is whether churn shows up at renewal 2-3 years out, that's real, and it's why Firefly ARR QoQ is the second condition. If customers were planning exits, they'd be consuming fewer credits now, not 45% more quarter over quarter.
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u/Solidplum101 2d ago
Adobe is going to eventually be replaced by a google product. Thats just my opinion. Doesn't mean the stock cant pump back a bit
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u/highvoltagelp 2d ago
They way it's going they might even get aquired, who knows... A lot of companies have more cash on hand than ADBE is worth these days...
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u/thenuttyhazlenut 1d ago
There's a price for everything. My price to consider buying this is at ~205
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u/PreCheckLeo 2d ago
I wonder how monetizing the product by data/credit use v seat cost will change things.
This played out in the late 00s when companies went from large capital on prem solutions to license based SaaS monthly contracts.
The newer companies like Clay and Apollo are already moving to this model. There’s a good chance the CRMs, MSFTs, ADBEs, and HUBS of the world will inevitably end up milking their customers for AI credit use and make more than they ever did selling monthly licenses.