Adobe’s AI Strategy Gains Traction Amid Record Financial Performance

Despite its share price declining approximately 21% year-to-date and underperforming the broader technology sector, Adobe has closed its 2025 fiscal year with record-breaking financial results. The robust operational data presents a compelling contrast to the stock's market performance, raising the question of whether the company's aggressive artificial intelligence initiatives can ultimately shift investor sentiment.

For the full fiscal year, the software giant reported revenue of $23.77 billion, an 11% increase. Annualized recurring revenue (ARR) climbed to $25.2 billion, and operating cash flow surpassed the $10 billion threshold for the first time in the company's history.

The fourth quarter alone delivered $6.19 billion in revenue, exceeding analyst consensus estimates of $6.11 billion. Adjusted earnings per share also outperformed expectations, coming in at $5.50 against a projected $5.40.

Artificial Intelligence Drives Measurable Growth

A key development is that over one-third of Adobe's recurring revenue is now influenced by AI-powered products and services. Usage of generative AI credits tripled in Q4 compared to the previous quarter. The company has significantly expanded its partnership ecosystem, securing collaborations with major cloud and AI platforms including Amazon Web Services, Microsoft Azure, Google Gemini, and OpenAI.

A strategic partnership with Runway provides Adobe's customers with exclusive access to cutting-edge video AI models. Furthermore, the mobile user base expanded by over 35%, reaching more than 70 million monthly active users.

Cautious Guidance and Strategic Acquisition

Management's forecast for the current fiscal year anticipates revenue in the range of $25.9 to $26.1 billion. Adjusted earnings per share are projected between $23.30 and $23.50. ARR growth is expected to be approximately 10.2%, a slightly more moderate pace than in 2025.

Should investors sell immediately? Or is it worth buying Adobe?

Concurrently, Adobe has announced plans to acquire Semrush Holdings for about $1.9 billion in cash. This transaction, slated for completion in the first half of fiscal 2026, is intended to bolster the company's position in the marketing analytics space.

Analyst Perspectives and Valuation

Equity researchers have issued mixed but generally positive adjustments to their price targets. Citigroup raised its target to $387 from $366, maintaining a Neutral rating. BMO Capital Markets slightly lowered its target to $400 from $405, reiterating an Outperform rating. Evercore ISI reduced its target to $425 from $450 while keeping an Outperform (Buy) recommendation.

The average analyst price target stands near $430, suggesting significant potential upside from current trading levels. With a forward price-to-earnings ratio of roughly 15, Adobe's valuation sits notably below its five-year historical average.

Navigating a Competitive Landscape

The primary risk facing Adobe is intensifying competition from AI-native alternatives and open-source tools, which are lowering entry barriers in the creative software market. Concerns over pricing power and user growth have prompted some institutional investors to reduce their holdings.

Adobe's counter-strategy involves deeply embedding AI functionality across its entire product suite while leveraging its expanded partner network to maintain a technological edge. The company retains substantial financial flexibility with $6.6 billion in liquid resources, earmarked for potential further share repurchases and strategic acquisitions.