This beaten stock looks cheap to ignore with 55% upside potential
Adobe Inc logo on phone with Tato Boo per Desk via ShutterStock
Valued at $164.1 billion, Adobe Systems (Adbe) has long been the dominant force in the creative software industry. The company has always evolved to meet the needs of creators, marketers, businesses and developers.
Despite strong reporting in the second quarter of 2025, Adobe’s stock has dropped 12.1% so far, dragging a gain of 5.5% on the S&P 500 Index ($SPX). Currently, the company integrates artificial intelligence (AI) into a range of tools, so the stock peaks in analyst profits and has earned a “strong buy” rating from the “medium buy” consensus a month ago.
Let’s see if Adbe stocks are in their long-term portfolio.
www.barchart.com
The transition from selling Adobe’s permanent licenses to a subscription-as-a-service software (SAAS) model worked in its favour. This transition has enabled Adobe to establish strong customer loyalty and significantly increase the overall addressable market. The company operates in three major segments.
Digital Media. This category includes flagship creative clouds and document cloud platforms such as 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 demonstrates the power of recurring revenue and margin expansion. In the most recent second quarter, Adobe reported revenue of $5.87 billion, representing 11% year-on-year growth. Adjusted dilution revenues rose 13% to $5.06 per share. The remaining performance obligation (RPO) measuring realised revenues increased 10% year-on-year to $19.7 billion, with current RPO of 67%, indicating a strong future outlook. Subscription revenue from business professionals and consumers totaled $1.6 billion in the second quarter, up 15% year-on-year. The group of creative and marketing experts 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 products from Acrobat, Express and Creative Cloud. Monthly active users of Acrobat and Express increased by more than 25% year-on-year, thanks to support from AI features. During the revenue 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 continues to grow, with a total generation exceeding 24 billion. Introduced in 2023, Firefly features Adobe’s generative AI models trained with Adobe stock images and licensed content. In particular, Firefly is more integrated across the product stack, from Photoshop to Genstudio. Digital media revenues rose to $4.35 billion, up 12%.
Similarly, digital experience revenues reached $1.46 billion, up 10%. The growing demand for AI-powered customer experience orchestration has driven its expansion. One of the fastest growing products in the segment, Genstudio is currently 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.
Additionally, Adobe effectively manages cash and returns value to shareholders through stock repurchases while investing in R&D and AI innovations. The company repurchased $3.5 billion in shares in the first quarter, earning $10.9 billion remaining from $25 billion allowed in 2024. The company’s balance sheet is also robust, with $5.7 billion in cash and short-term investments and a manageable debt ratio of 0.54 times.
After the strong first half, Adobe raised year-round guidance. Currently, full-year revenues for fiscal year 2025 ranged from $23.5 billion to $23.6 billion, up 10% in fiscal year 2024. Digital media revenues range from $17.45 billion to $17.5 billion, while digital experience revenues range from $5.8 billion to $5.9 million. Subscription revenue for the Digital Experience segment is expected to range from $5.37 billion to $5.42 billion.
Additionally, Adobe expects the adjusted EPS to be between $20.50 and $20.70 for fiscal year 2025, representing a 12% increase at the midpoint. The company has reaffirmed its 11% growth target for Digital Media Ending ARR and is on track to over $250 million directly in AI ARR by the end of the year.
Analysts covering stocks forecast that Adobe’s revenue and revenue will increase by 9.6% and 11.7% in 2025, respectively.
As for valuation, Adobe is currently trading at an estimated revenue of 18 times as much as 2025. This is nearly 45% lower than the stock’s historic average P/E over the past five years.
Wall Street’s confidence in Adobe Stock is reflected in an upgrade from a “medium buy” to a “strong buy” consensus rating a month ago. Recently, Bradley Sills of Bank of America Securities Analyst maintained a “buy” rating of Adobe stock with a price target of $475, citing the company’s strategic positioning and long-term growth outlook. According to Sills, Adobe is in the early stages of the Agent AI cycle, revolutionizing creative workflows through the rise in automation.
Sills says Adobe’s focus on data governance, cloud security and integration of third-party AI models will strengthen its position as a leader in enterprise digital transformation. Adobe has recently launched 12 AI agents and formed major partnerships with major tech companies, making it suitable for future growth.
Of the 34 analysts covering stocks, 23 have a “strong buy” recommendation, with two analysts rated it as “medium buy” and nine ratings as “pending.” ADBE’s average analyst’s target price is $499.40, meaning 28% upside above the current level. Additionally, the $605 street estimate shows that the stock could rise 55% over the next 12 months.
With robust revenue growth, record cash flow, increased adoption of AI, and increased guidance, Adobe is well positioned to maintain leadership in digital creativity and experience landscapes. This could be a great opportunity for long-term investors to acquire this AI software stock at a discounted price.
www.barchart.com
On the date of publication, Sushree Mohanty had no position (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published barchart.com
