Adobe’s Strong Earnings Fail to Lift Investor Sentiment

Despite delivering a robust set of quarterly results, Adobe's stock continues to face significant headwinds. The software giant's shares have declined approximately 29% since the start of the year, underscoring a persistent disconnect between its financial performance and market valuation.

On December 10, Adobe reported its fiscal fourth-quarter 2025 earnings. Revenue reached $6.19 billion, marking a 10% year-over-year increase and surpassing analyst estimates of $6.11 billion. Adjusted earnings per share came in at $5.50, also beating the consensus forecast of $5.40.

For the full fiscal year, total revenue climbed 11% to $23.77 billion. The company's annualized recurring revenue (ARR) grew 11.5% to $25.66 billion. A record operating cash flow of $3.16 billion was generated in the fourth quarter alone.

Segment performance remained solid. The Digital Media unit, home to products like Photoshop, saw revenue advance 11% to $4.62 billion. The Digital Experience business grew 9% to $1.52 billion.

Cautious Analyst Stance Amid AI Concerns

The market's reaction to these figures has been notably muted. Several research firms have adjusted their outlooks. Wall Street Zen downgraded the stock from "Buy" to "Hold." While maintaining a "Buy" rating, Jefferies reduced its price target from $590 to $500. TD Cowen set a $400 fair value estimate, and DA Davidson maintained a more optimistic $500 target.

The average price target now stands near $419, representing a potential upside of about 20% from the current trading level around $350. This collective caution is primarily driven by rising competition in artificial intelligence.

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

Mounting Pressure from AI Competitors

Investor apprehension centers on the threat posed by AI-powered image-generation tools, which directly challenge Adobe's core creative software offerings. Competitors like Figma are expanding at a considerably faster pace, with growth rates exceeding 35%.

In response, Adobe is aggressively pursuing its own AI strategy. The use of generative AI credits tripled in just one quarter. Engagement with AI features in Acrobat and Reader quadrupled year-over-year. Furthermore, recurring revenue from content automation services, including Firefly Services and Firefly Foundry, doubled.

Guidance Points to a Growth Slowdown

Adobe's forward-looking statements have done little to alleviate concerns. For fiscal 2026, management projects revenue between $25.90 billion and $26.10 billion, implying growth of roughly 9.3%. Adjusted earnings per share are forecast to be in the range of $23.30 to $23.50, an increase of about 11.7%.

However, the company anticipates a deceleration in ARR growth to 10.2%, down from 11.5%. The operating margin is also expected to contract from the current level of approximately 45%, as heavy investments in AI technology weigh on near-term profitability. Despite this pressure, the free-cash-flow margin remains exceptionally strong at 41%.

Trading near a 52-week low, Adobe's shares now carry a price-to-earnings ratio of around 21, well below historical valuation levels. The central question for investors is whether the company can reaccelerate its growth trajectory or must adapt to a new era of more moderate expansion.