Creative software leader, Adobe (ADBE), was at it again, as expected. The beat-and-raise king did what many stock watchers already knew they would and posted a very solid Q3, beating both EPS and revenue estimates by a considerable margin, achieving double-digit growth, and even raising its annual guidance. As I anticipated before the earnings release, a beat-and-raise was the base-case scenario for Adobe, consistent with its strong track record of exceeding market expectations.
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However, despite a brief post-Q3 euphoria in after-hours trading, the stock opened the next session, giving back its gains as the market digested the results more carefully. In my view, the positive impact of AI advancements, such as Firefly and the Acrobat AI Assistant, was somewhat overshadowed by a slight sequential slowdown in average recurring revenue from digital subscriptions—fueling the perception that competition is moderating Adobe’s growth story.
That said, Adobe’s valuation still reflects an apparent asymmetry. The company is expanding its operating margins and generating substantial cash flows, yet it trades at a discount that appears excessive, given the relatively modest risk posed by next-generation AI models. On this basis, I maintain a Buy rating on the stock.
Flawless Execution Meets a Slower Subscription Pulse
Adobe’s recently released quarterly results were nearly flawless from a financial perspective, showing virtually no weakness in any single metric. If the market feared that Adobe might struggle to deliver double-digit top- and bottom-line growth, those concerns were unfounded. Revenues hit a new quarterly record of $5.99 billion, up 11% year-over-year, versus the ~9.5% growth that had been expected. Non-GAAP earnings per share came in at $5.31, a 10.7% year-over-year increase, beating the ~8% growth anticipated.
On the margins front, non-GAAP operating margins reached 46.3%, up from 45.5% in Q2, and roughly flat year-over-year. From a cash flow perspective, Adobe generated $2.19 billion in operating cash flow, which translated into $1.92 billion in free cash flow, also a double-digit annual increase of 11.3%, largely driven by leaner CapEx.
On the less exciting side, the company’s key metric—Digital Media ARR (Annual Recurring Revenue)—advanced to $18.6 billion, representing 11.7% growth over 12 months. While still solid double-digit growth, this marks a slight sequential slowdown from 12.1% in Q2 and 12.6% in Q1, suggesting that digital subscription revenues (Photoshop, Illustrator, etc.) are growing a bit more slowly—likely due to headwinds from competitors such as Canva, Figma (FIG), and other AI tools capturing new or existing Adobe users.
On AI adoption, Adobe reported that AI-influenced ARR exceeded $5 billion, with products like Firefly and the Acrobat AI Assistant already surpassing $250 million in ARR in the second fiscal quarter of 2025—though this still represents just over 1% of total ARR.
Despite these slight slowdowns, Adobe raised its revenue growth forecast for Digital Media to 11.3% by the end of Fiscal 2025, up from 11% previously, citing upsell opportunities in Creative Cloud Pro and better visibility for cross-sell and new consumption-based revenue models.
Stability Falls Flat in a Market Obsessed With Flash
While recent results show that Adobe is far from doomed, there are undeniably competitive pressures slowing its growth—albeit only slightly. Double-digit growth across virtually all key financial metrics is impressive, but it can seem minuscule when the market’s focus is on hypergrowth fueled by AI, rather than on steady, sustained growth despite the presence of AI.
A recent example is Oracle (ORCL), which is somewhat comparable to Adobe in sector terms. Oracle’s remaining performance obligations (RPO) jumped 389% year-over-year to $455 billion in its last reported quarter, compared with 41% growth previously. This surge prompted the company to dramatically raise guidance and drove the stock up more than 40% post-earnings.
By comparison, Adobe reported an RPO of $20.44 billion, up 12.7% year-over-year and 3.8% higher than last quarter. Of this total, 67% is expected to be recognized as revenue within 12 months, which indicates strong predictability for the coming year—but does not signal exceptionally high long-term demand.
There are nuances to consider. If Adobe were to focus excessively on boosting RPOs and closing deals at the expense of margins, that could be a misguided strategy, especially given the company’s consistent overall business performance.
At the same time, the current market cycle seems impatient with any company that isn’t posting jaw-dropping RPO numbers, particularly those driven by AI. Ultimately, Adobe still needs to prove that even if growth remains moderate for several years, its steady, consistent execution will pay off over the long term.
Adobe’s Valuation is Built on Cash, Not Hype
The key takeaway is how much Adobe’s current position—based on what it has delivered and what it is expected to deliver—is already reflected in its valuation. With a market cap of ~$148 billion and $9.4 billion in free cash flow generated over the last twelve months, Adobe trades at a price-to-free cash flow ratio of just under 16x. By comparison, software peers like Microsoft (MSFT) trade at 52x, while Oracle currently posts negative cash flows, largely due to massive CapEx on AI infrastructure.
For this reason, I’d say Adobe looks particularly de-risked on this metric. Focusing on free cash flow reduces dependence on growth forecasts because even if growth moderates, the existing cash flow already guarantees value. Moreover, it provides the company with greater financial flexibility to repurchase shares and, more importantly, to invest in growth.
Is ADBE a Buy, Hold, or Sell?
The Wall Street consensus is moderately bullish, with 21 of 31 analysts rating ADBE a Buy, seven a Hold, and two a Sell. ADBE’s average stock price target is currently $470.48, implying an upside potential of almost 36% from the latest share price.
Adobe’s Consistency Deserves More Than a Discount
Adobe posted another remarkably consistent quarter, exceeding market expectations on both top and bottom lines, but apparently that wasn’t enough to convince the market that the risk of user erosion is off the table. While minimal, the continued slowdown in Digital Media’s average recurring revenue highlighted this trend, and the market clearly prefers to chase hypergrowth driven by AI demand rather than steady, sustainable growth.
That said, this doesn’t mean that the valuation gap, especially when looking through a cash flow lens, justifies the stock’s massive and continued underperformance. On the contrary, I believe Adobe remains significantly undervalued for what it delivers. For this reason, I continue to reinforce Adobe as a Buy at current levels around $350 per share.