Adobe: After Lifting Guidance, Is the Beaten-Down Stock Ready to Break Out?

While off its lows, Adobe (NASDAQ: ADBE) stock is still down nearly 30% on the year over fears that AI will disrupt its business. However, the company continues to see solid revenue growth, produce robust free cash flow, and the stock remains cheap.

Let's take a closer look at Adobe's results and prospects to see if it can finally start to break out to the upside.

Image source: The Motley Fool

The Freemium strategy

To try to kick-start growth, Adobe has adopted a freemium model meant to help drive user adoption and convert casual users into long-term subscribers. This includes free offerings such as Adobe Express and mobile tools, as well as users getting limited monthly generative AI credits. The hope is that these users will buy more AI credits and eventually move to the company's more advanced premium subscriptions. Adobe said its monthly active freemium users grew 70% year over year to surpass 100 million in the quarter.

For its fiscal third quarter, Adobe saw revenue climb 13% year over year to $6.76 billion. This was above its prior forecast for revenue of between $6.67 billion and $6.72 billion. Adjusted earnings per share (EPS) jumped 15% to $6.13, ahead of its earlier $6.05 to $6.10 outlook.

Among individual segments, business professionals and consumers subscription revenue (which includes Adobe Acrobat and web-based solutions like Express) saw revenue increase by 16% to $1.91 billion. Creative and marketing professionals subscription revenue (which includes programs like Photoshop and Adobe Experience Manager) grew 13% to $4.65 billion.

Looking ahead, Adobe provided the following guidance, as seen in the table below:

Data source: Adobe earnings releases. FY = fiscal year.

For the fiscal fourth quarter, meanwhile, it provided the following outlook:

Data source: Adobe earnings releases.

Adobe also announced that it has agreed to acquire Topaz Labs. The AI photo and video enhancement software company boasts more than 1 million users, and its technology will be integrated across Adobe's creative AI solutions.

Is Adobe stock a buy?

Adobe has been an unfailing low double-digit revenue grower, although some investors remain wary of the stock despite its consistency. New annual recurring revenue (ARR) growth has slowed, with new ARR seeing a steep 39% year-over-year decline. Right now, this can be attributed to the company trying to find the right balance between near-term revenue growth and longer-term user acquisition through its freemium model, which could lead to more robust growth in the future.

AI revenue is growing quickly, with AI ARR up 150% to $650 million. However, that is still a small percentage of the company's overall revenue and isn't really moving the needle at this point.

Turning to valuation, the stock currently trades at a forward price-to-earnings (P/E) ratio of 9 times fiscal year 2027 analyst estimates (ending November 2027). For a high gross margin software-as-a-service (SaaS) business growing revenue by double digits that generates strong free cash flow, that's a bargain.

While Adobe remains out of favor and has no immediate catalyst, I think the stock is just too cheap at current levels to completely write off. As such, I think patient investors can buy the stock at current levels.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.