Adobe Inc. (ADBE): A Bull Case Theory

Core Thesis - Adobe Inc. is viewed positively despite a 35% stock decline over the past year due to concerns about AI commoditizing its creative software, as it remains the dominant provider of digital content tools [2][4] Financial Performance - Adobe's core Digital Media segment, including Creative Cloud, Adobe Express, and Document Cloud, is projected to generate $15.9 billion in 2024, accounting for 74% of total revenue, while the Digital Experience segment is expected to contribute $5.4 billion [2] - The company has demonstrated consistent financial strength with a 13% revenue CAGR over five years, gross margins around 89%, operating margins above 35%, and a return on invested capital (ROIC) near 25% [5] - As of Q2 2025, Adobe has a growing backlog of $19.7 billion and has repurchased $14 billion of stock since March 2024, reducing share count by 9% [5] Market Position and Competitive Landscape - Adobe is investing heavily in AI through its Firefly initiative, which enhances workflow efficiency and creative output, addressing the "blank-page" problem [3] - Despite competition from cheaper AI alternatives, Adobe's professional user base remains largely insulated due to the need for seamless integration, reliability, and legally safe outputs [4] - Competing platforms like Canva primarily serve hobbyists and small businesses, which do not pose a significant threat to Adobe's high-value creative customers [4] Valuation and Growth Potential - Adobe is currently trading at 16 times trailing free cash flow, requiring only 8.2% annual free cash flow growth to justify its current price, compared to a historical growth rate of 21%, indicating low market expectations [5] - The adoption of AI is expected to expand Adobe's addressable market, presenting a compelling risk/reward profile and an attractive entry point for investors [5]