Verdict: WATCH (confidence 3/5) · price $241.05 on 2026-10-08 · tranches $225 / $180 / $140 · trim above $330 Adobe looks like a wonderful business (ROIC ~40%, cash conversion 1.45, debt 0.6 years of FCF) priced at ~13x GAAP and ~10x non-GAAP earnings. The screen says 3 methods agree, but its Sticker ($537) and Payback ($415) both assume 15% growth. Reworked at 10% growth, only Payback and Ten Cap agree and Sticker is ~$230. The open question is whether generative AI turns a toll bridge into a commodity (METHOD 3, tech split). Research, not advice.
R · Radar
- Screen: status BUY, tier B, 3 of 3 methods agree on the screen's numbers (price/Sticker 0.45), Big Five 11/15. Down 34% from the 52-week high. No screen flags. Why selected: requested.
- Radar (2026-10-09): WATCH. Unconfirmed reports that Adobe's PERM green-card cases are on hold (only Cloudera's suspension is confirmed). A hiring and regulatory issue, not a moat breach [5].
- Gurus: none in the 13F data (13F lag ~4 months).
- Next report ~2026-12-22; the new CEO starts 1 Dec [3].
U · Understand
- The business in one sentence: Adobe sells subscription software that creative, marketing and document workers use to make, edit, sign and manage digital content.
- Money: the FY26 revenue guide is $26.6B [1]. Adobe now reports two customer groups: Creative & Marketing Professionals ~$18.3B (~69%) and Business Professionals & Consumers ~$7.5B (~28%). Products: Photoshop, Illustrator and Premiere in Creative Cloud, Acrobat and Document Cloud, Experience Cloud for marketing (product list from general knowledge; 10-K not re-read this run [2]). Ending ARR $27.5B [1]. Hook: file formats, workflows, team libraries and trained users.
- Rivals: Canva, Figma, Microsoft and Google office suites, AI-native tools (OpenAI, Midjourney) [3].
- Weather: the trend is generative AI, which could cut paid seats or lower the price of creation. Management says AI-first ARR grew >150% [1]. No major customer concentration found. The hiring/visa item is minor.
- Circle of competence: 3/5. I understand the subscription economics. Still to learn: how much ARR is exposed to AI substitution, seat-count trends, net new ARR by cohort, and stock-based compensation (not confirmed this run).
L · Love (moat and management)
- Moat: switching costs and ecosystem (file formats, workflows, trained users), plus brand and the PDF standard. Statement: professionals cannot easily leave a toolset their teams and files depend on. Replication test: a rival with Adobe's market cap could build a tool, but not the installed base. Disappears test: the creative industry would notice. Pricing power: ROIC rose from 13% (2016) to 40% (2025) and revenue grew 13% with no sign of margin loss. A brand isn't automatically a moat (METHOD 3); the open test is whether AI makes the output cheap enough that the tool matters less.
- Management: buybacks are heavy: ~9.5M shares for $2.23B in Q3 (average ~$235) [1]; shares fell from 507M (2015) to 427M (2025). Buying below value is good; at the corrected value this price qualifies. Debt $6.4B = 0.6 years of FCF, well inside METHOD 4. Cash conversion 1.45. Leadership: CEO Narayen (18 years) hands over to Anil Chakravarthy on 1 December and becomes executive chair; CFO Dan Durn left in June and Steve Day is interim [3][4]. The new CEO's name rests on one secondary source: verify it in the 8-K. Proxy incentives: not read this run. Insider activity: not found.
- Values: nothing found that the owner would veto. AI-training and copyright disputes: not researched.
- Would I buy the whole company at this price? Yes, tentatively: ~$97B for ~$10.6B of FCF is a good price if the franchise survives. That "if" is why the verdict is WATCH.
E · Event
- What happened: shares fell from ~$370 (52-week high) to a low near $190 in July on AI-disruption fear, the CEO succession announcement (March) and the CFO exit (June) [3][4]. Q3 (10 Sep) beat slightly and raised the full-year guide; the Q4 revenue guide was in line to slightly below consensus [1].
- Event checks (METHOD 7):
- Known: ✔ AI fear plus leadership change.
- Easy to find: ✔ in every headline.
- Needs at least a year: ✔ AI monetisation is a multi-year proof.
- Resolves within ~3 years: ? Whether AI expands or erodes seats may take longer to show.
- No new debt needed: ✔ debt is 0.6 years of FCF.
- You would own it for life: ? Likely, but it depends on the AI answer.
- Event or problem? Closer to a possible changed story than a one-time event: the fear is structural, not a one-off fix. The numbers (13% growth, rising ARR) show no damage yet, so I do not call it AVOID. It is 34% off the high, so not a cheap-at-a-record value trap.
R · Reduce basis (tranches only, no options)
| Tranche | Price | Basis | Status |
|---|---|---|---|
| 1 | $225 | ≈ corrected Sticker ($230, 10% growth) | Not triggered (price $241) |
| 2 | $180 | ≈ 10x GAAP TTM EPS of $17.91 | Not triggered |
| 3 | $140 | ≈ 8x GAAP EPS; room for an AI-erosion case | Not triggered |
The default tranche_plan was $415 / $307 / $269, all triggered. I moved them down because (a) the $415 Payback assumes 15% FCF growth for 8 years, (b) the Ten Cap uses owner earnings that add back stock compensation, (c) the story risk is unresolved. Equal dollar tranches, set in advance; keep dry powder for a further ~50% fall. Stop buying above $225. Trim above $330 (Sticker at an optimistic 12% growth).
S · Story
- Thesis: Adobe's creative and document software is embedded in how professionals work. AI makes the tools more useful and adds revenue (AI-first ARR), while buybacks shrink the share count 2–4% a year. At ~10x non-GAAP earnings the market prices in decline; even modest growth gives a satisfactory return.
- Three things that must stay true: (1) ARR keeps growing ≥8–10% (FY26 ending-ARR growth guide 10.2% [1]); (2) ROIC stays above ~25%; (3) AI features are monetised rather than given away.
- Inversion: AI agents generate finished assets from text, so fewer professionals need Photoshop-class seats, Canva and Figma take the low end, and price per seat falls; a new CEO and an interim CFO add execution risk. Rebuttal: 13% growth and AI-first ARR >150% so far, and the installed base buys workflow, not just output. Concession: this is a back-window argument (METHOD 3) and cannot rule out a later break.
- Sell triggers: ending-ARR growth below 6% for two years; ROIC below 15% for two years; net debt above 3x FCF; a permanent CEO/CFO problem followed by a guidance cut; disclosed seat counts declining.
Numbers
| Item | Screen | Corrected / note |
|---|---|---|
| Sticker | $537.30 (15% growth, future P/E 30) | ~$230: 17.91 × 1.10^10 × P/E 20 ÷ 1.15^10 = 17.91 × 2.594 × 20 ÷ 4.046. At 12% it is ~$330. EPS growth 5y is 9.1%, ARR guide 10.2%, revenue 13%. |
| MOS price | $268.65 | ~$115 (10% growth) |
| Payback (8 yrs FCF) | $415.00 (implies 15% FCF growth) | $210 flat FCF; $302 at 8%; $331 at 10% (FCF $10.59B, ~403M shares) |
| Ten Cap | $307.49 | Holds on the screen's owner earnings ($12.59B × 10 − $2.0B net debt). Owner earnings add back stock compensation (amount not confirmed): each $1B/yr of SBC removes ~$25 per share. |
| Windage growth | 15% | 10%: below history (sales 13–17%, EPS 9–30%) given AI risk |
| P/E | 13.5 TTM vs 10-yr median 45.3 | ~9.9x the FY26 non-GAAP EPS guide of $24.45–24.50 [1] |
| Owner earnings / net debt / cash conversion | $12.59B / $2.0B / 1.45 | Net debt = debt $6.4B less cash $4.4B |
Big Five (screen): ROIC 10y 24.9%, 5y 29.8%; sales growth 10y 17.4%, 5y 13.1%; EPS 10y 29.7%, 5y 9.1%; OCF 10y 21.2%, 5y 11.9%. BVPS growth 5y is −0.1% because buybacks shrink equity; it fails the BVPS test without implying weakness.
| FY | Revenue $B | EPS | OCF $B | FCF $B | ROIC |
|---|---|---|---|---|---|
| 2016 | 5.85 | 2.32 | 2.20 | 2.00 | 13.1% |
| 2017 | 7.30 | 3.38 | 2.91 | 2.73 | 16.6% |
| 2018 | 9.03 | 5.20 | 4.03 | 3.76 | 19.5% |
| 2019 | 11.17 | 6.00 | 4.42 | 4.03 | 26.1% |
| 2020 | 12.87 | 10.83 | 5.73 | 5.31 | 24.4% |
| 2021 | 15.79 | 10.02 | 7.23 | 6.88 | 25.9% |
| 2022 | 17.61 | 10.10 | 7.84 | 7.40 | 27.3% |
| 2023 | 19.41 | 11.82 | 7.30 | 6.94 | 26.4% |
| 2024 | 21.51 | 12.36 | 8.06 | 7.87 | 29.7% |
| 2025 | 23.77 | 16.70 | 10.03 | 9.85 | 39.9% |
Deep dive model (reports/model/ADBE.md): a 10-year DCF at 10.5% WACC gives $339/share (perpetuity, 3% terminal growth) to $398 (14x EBITDA exit); the sensitivity grid runs $283–$434. It assumes revenue growth fading from 10% to 4%. It supports value near my trim level but does not test an AI-erosion case.
Sources
- Adobe Q3 FY26 results (Finviz copy of release) and Adobe press release page
- Adobe 10-K filings on SEC EDGAR (not re-read this run)
- Fortune: Narayen to step down and 24/7 Wall St: nearing 52-week low
- CFO Durn to resign, Day interim
- Radar item: PERM cases (Gulte)
Changelog
- 2026-10-09: created. Verdict WATCH: the screen's Sticker and Payback assume 15% growth; corrected to 10%, Sticker is ~$230 and only two methods agree. Story risk (AI, CEO handover, interim CFO) is unresolved.