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Adobe Systems (ADBE), valued at $164.1 billion, has long been a dominant force in the creative software industry. The company has been constantly evolving to meet the needs of creators, marketers, businesses, and developers.
Despite a strong report for the second quarter of its fiscal 2025, Adobe’s stock is down 12.1% year to date, trailing the S&P 500 Index’s ($SPX) 5.5% gain. Now, as the company integrates artificial intelligence (AI) into its suite of tools, the stock has piqued analysts’ interest, earning a “Strong Buy” rating, up from a “Moderate Buy” consensus a month ago.
Let’s see if ADBE stock has a place in a long-term portfolio.
Adobe’s Business Model: The Power of Recurring Revenue
Adobe’s transition from selling perpetual licenses to a subscription-based software as a service (SaaS) model worked in its favor. This transition enabled Adobe to establish strong customer loyalty and significantly increase its total addressable market. The company operates in three main segments:
- Digital Media. This category includes the flagship Creative Cloud and Document Cloud platforms, which include Photoshop, Illustrator, and Adobe Acrobat.
- Digital Experience. This segment drives digital marketing and customer engagement strategies.
- Publishing and Advertising. Adobe continues to generate revenue from legacy products and advertising services.
Adobe’s financial performance over the past decade displays the power of recurring revenue and margin expansion. In the most recent second quarter, Adobe reported revenue of $5.87 billion, representing 11% year-over-year growth. Adjusted diluted earnings increased 13% to $5.06 per share. Remaining performance obligations (RPO), which measure revenue to be realized, increased 10% year on year to $19.7 billion, with current RPO at 67%, indicating strong forward-looking demand. Subscription revenue from business professionals and consumers totaled $1.6 billion in Q2, up 15% year over year. The creative and marketing professionals group generated $4.02 billion in subscription revenue, up 10% year on year.
The Digital Media segment remains Adobe’s growth engine, with continued strength in Acrobat, Express, and Creative Cloud offerings. Monthly active users of Acrobat and Express combined increased by more than 25% year on year, aided by AI capabilities. During the earnings call, management noted that Creative Cloud’s flagship products (Photoshop, Lightroom, and CC All Apps) experienced strong growth, particularly in emerging markets such as India, Latin America, and Eastern Europe.
Firefly adoption is continuing to grow, with total generations exceeding 24 billion. Firefly, introduced in 2023, is Adobe’s generative AI model trained on Adobe Stock images and licensed content. Notably, Firefly is becoming more integrated throughout the product stack, from Photoshop to GenStudio, which is gaining significant enterprise traction. Digital Media revenue increased to $4.35 billion, up 12%.
Similarly, Digital Experience revenue reached $1.46 billion, up 10%. A growing demand for AI-powered customer experience orchestration drove the expansion. GenStudio, one of the segment's fastest-growing products, is now integrated with Firefly for creative and marketing automation. GenStudio’s ARR increased by more than 25% year on year as more enterprise clients used the platform for performance marketing.
Furthermore, Adobe manages its cash effectively, returning value to shareholders through share repurchases while investing in R&D and AI innovations. The company repurchased $3.5 billion in shares in Q1 and still has $10.9 billion remaining from its authorized $25 billion granted in 2024. The company’s balance sheet is also robust, with $5.7 billion in cash and short-term investments and a manageable debt-equity ratio of 0.54x.
Updated Guidance Signals Confidence in Execution
Following a strong first half, Adobe raised its full-year guidance. It now expects full-year fiscal 2025 revenue of $23.5 billion to $23.6 billion, a 10% increase over fiscal 2024. Digital Media revenue could be between $17.45 billion and $17.5 billion, while Digital Experience revenue could be between $5.8 billion and $5.9 billion. Subscription revenue for the Digital Experience segment is expected to range between $5.37 billion and $5.42 billion.
Additionally, Adobe expects adjusted EPS to be between $20.50 and $20.70 in fiscal 2025, representing a 12% increase at the midpoint. The company reaffirmed its target of 11% growth in Digital Media ending ARR and remains on track to exceed $250 million in direct AI ARR by the end of the year.
Analysts who cover the stock predict that Adobe's revenue and earnings will increase by 9.6% and 11.7%, respectively, in fiscal year 2025.
In terms of valuation, Adobe is currently trading at 18 times forward 2025 estimated earnings, which is nearly 45% lower than the stock’s five-year historical average P/E.
What Does Wall Street Say About Adobe Stock?
Wall Street’s confidence in Adobe stock is reflected in its upgrade to a “Strong Buy” consensus rating from a “Moderate Buy” a month ago. Recently, Bank of America Securities analyst Bradley Sills maintained a “Buy” rating on Adobe stock with a $475 price target, citing the company’s strategic positioning and long-term growth prospects. According to Sills, Adobe is in the early stages of the agentic AI cycle, which will revolutionize creative workflows through increased automation.
Sills went on to say that Adobe’s focus on data governance, cloud security, and the integration of third-party AI models strengthens its position as a leader in enterprise digital transformation. Adobe is well-positioned for future growth, having recently launched 12 AI agents and formed key partnerships with major tech firms.
Out of the 34 analysts covering the stock, 23 have a “Strong Buy” recommendation, two analysts rate it a “Moderate Buy,” and nine rate it a “Hold.” The average analyst target price of $499.40 for ADBE implies 28% upside above current levels. Furthermore, its Street-high estimate of $605 indicates the stock can rally as much as 55% over the next 12 months.
With robust revenue growth, record cash flows, rising AI adoption, and increased guidance, Adobe is well-positioned to maintain its leadership in the digital creativity and experience landscape. This could be an excellent opportunity for long-term investors to grab this AI software stock at a discount.
