Adobe Trades at 10 Times Next Year's Earnings. Is It Finally Time to Buy the Stock?

Adobe (NASDAQ: ADBE) trades at $264.02 as of this writing, about 29% below its 52-week high of $370.86. After that slide, the stock costs about 15 times the earnings it reported over the past year. It costs about 11 times the non-GAAP (adjusted) earnings management expects for the current fiscal year, and roughly 10 times what analysts project for the year after that.

Multiples like these are what the market typically assigns to businesses whose profits have stopped growing, or are about to. Adobe grew revenue 13% last quarter, to a record. In other words, the price and the results disagree.

Is the creative software giant a business in decline, or one of the cheaper growth stocks in the market?

Image source: Getty Images.

Records, not decline

Adobe's fiscal second quarter of 2026 (the period ended May 29) was the best in the company's history by revenue -- $6.62 billion, up 13% year over year, or 11% in constant currency. Growth was 11% in the year-ago quarter and 12% in this year's fiscal first quarter. Measured in constant currency, all three quarters grew 11% -- steady, not accelerating.

The growth was broad, too. Subscription revenue from the company's business professionals and consumers group (the one built around Acrobat and other everyday productivity tools) rose 16% year over year, while subscription revenue from the larger creative and marketing professionals group grew 13%. Profits kept pace. Adjusted earnings per share came in at $5.96, up 18% year over year, alongside $4.25 per share on a GAAP basis.

The recurring base kept building as well. Adobe exited fiscal Q2 with $27.1 billion in annualized recurring revenue (including about $480 million from newly acquired Semrush), and its remaining performance obligations (contracted revenue not yet recognized) stood at $22.3 billion. On the strength of the quarter, management raised its full-year targets for both revenue and adjusted earnings per share, and it said annualized recurring revenue from its artificial intelligence (AI)-first products tripled year over year, exceeding $500 million.

And the company keeps shrinking its share count. Adobe generated $2.17 billion in operating cash flow during the quarter and repurchased about 8.5 million shares -- roughly 2% of its shares outstanding, in three months.

The AI worry

Of course, there are reasons the stock is this cheap, and the biggest is the AI threat itself. Generative AI can now produce images, video, and design work on its own, and if that is where creation is headed, fewer people may need Adobe's professional tools.

For now, however, the fear shows up in Adobe's stock price far more than in its reported numbers. The soft spots are modest. Total annualized recurring revenue is on pace to grow about 10% this fiscal year, slower than revenue -- and that pace leans on the roughly $480 million of recurring revenue that arrived with the Semrush deal, so the organic base is likely slowing more than the headline number shows. The company took a roughly $70 million goodwill impairment on its publishing and advertising unit in fiscal Q2.

And Adobe's chief financial officer departed in June, with Steve Day, a 20-year company veteran, stepping in on an interim basis. The bigger open seat is the top one. CEO Shantanu Narayen said in March, after 18 years in the job, that he'll step aside once the board names a successor. Each of those is worth watching, and none of them shows up in the growth numbers yet.

The AI-first recurring revenue figure cuts the other way entirely. A product group tripling to more than $500 million in annualized recurring revenue inside Adobe is, so far, evidence of AI adding to the company's sales. The threat may still arrive. It hasn't yet.

A decline the numbers don't show

At roughly 10 times next year's expected earnings, the market is pricing Adobe as if its growth is about to stop.

But things don't look that way.

A company growing revenue at a double-digit rate, raising its guidance, and buying back 2% of its shares in a single quarter doesn't usually trade at these multiples unless the market believes something is about to break.

Maybe something will. AI is arguably the most serious competitive threat Adobe has faced in a long time, and a technology shift this large could eventually pull customers away faster than it adds revenue.

But that would be a future problem showing up in future numbers. In the reported ones, revenue set a record last quarter, the revenue and adjusted earnings targets went up in June, and the products the market fears most are the ones growing fastest. The stock is priced for a decline that, for now, exists only in the forecast.

Ultimately, I think shares look attractive here.

Daniel Sparks and his clients do not have positions 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.