Adobe Earnings: Forward-Looking Metrics Under Pressure from Freemium Transition

Key Morningstar Metrics for Adobe

• : $344.00
• : ★★★★

• Morningstar Economic Moat Rating

  : Narrow

• Morningstar Uncertainty Rating

  : High

What We Thought of Adobe’s Earnings

Adobe ADBE delivered a strong fiscal third quarter, with total revenue growing 12% in constant currency. Gross and operating margins were stable at 89% and 35%, respectively. Monthly active users across creativity and productivity solutions crossed 1 billion.

Why it matters: Despite solid quarterly results, Adobe’s freemium pivot is weighing on its forward-looking metrics. Remaining performance obligations growth of 8% decelerated sharply from last quarter’s 13%. Annual recurring revenue growth also slowed to 11% from 12%.

• The RPO and ARR growth deceleration could negatively affect Adobe’s future revenue expansion. Management claims the free-to-paid conversion should materialize in 2027. However, without a clear monetization strategy, we model revenue growth to remain below 10% through fiscal 2030.
• We have a hard time deciphering Adobe’s year-over-year AI-first ARR growth of over 150%, given the lack of clarity around the definition of “AI first.” It is uncertain how newly acquired assets from Topaz Labs can narrow the gap between Firefly and frontier models for image and video generation.

The bottom line: We reduce our fair value estimate for narrow-moat Adobe to $344 per share from $380 as we bake in stronger uncertainty around the new freemium model. The shares currently look undervalued, but the freemium pivot is a risk overhang that may persistently pressure Adobe’s price in the near term.

• Adobe’s valuation is one of the lowest in our enterprise software coverage. We see multiple near-term risk factors that prevent the market from assigning a higher valuation, including increased competition from artificial intelligence labs and deteriorating sentiment in the lower-end market.
• In the long term, we still think Adobe’s switching costs can help the company defend its status as the go-to tool for creativity and marketing professionals. Existing digital assets and workflows embedded in the Adobe ecosystem should allow stable price increases that drive top-line growth.