Citi Downgraded Adobe Stock to Sell. I'd Buy It Now.

Adobe (NASDAQ:ADBE) has a new Sell rating to deal with. On Nov. 4, Citigroup analyst Tyler Radke downgraded the creative software company to Sell from Neutral and cut his price target to $207 from $250. Citi sees downside risk to Wall Street's growth estimates for Adobe going into fiscal 2027.

Shares didn't drop on the news. Actually, Adobe stock gained about 1% that day.

But the stock was already having a tough year. At roughly $242 as I write, it's down about 31% in 2026.

I wrote about Adobe's long history of steep drops under two weeks ago, and Citi's Sell rating is the only new development since then. I don't think the downgrade is wrong about the direction of Adobe's growth. But I do think the stock price already bakes in something far worse than what Adobe's own numbers show.

Image source: Getty Images.

Adobe's growth is slowing

Citi points to industry data showing rising pressure on Adobe from artificial intelligence (AI) and among small businesses. It also thinks changes to the creative business under Anil Chakravarthy, who becomes Adobe's CEO on Dec. 1, might hold back short-term growth.

Adobe's own numbers already show some slowing. Heading into fiscal 2026, the company aimed for 10.2% growth in total annualized recurring revenue (ARR), a gauge of what its subscriptions pull in over a year. Later, Adobe closed its acquisition of the marketing software company Semrush, which added around $480 million in ARR. But the full-year ARR target didn't move. Without the purchase, that target comes out to growth of only around 8%.

Profits are cooling, too. Adobe's non-GAAP (adjusted) net income climbed around 8% year over year in the fiscal third quarter of 2026 (the period ended Aug. 28, 2026), down from about 11% in the fiscal second quarter and 12% in fiscal Q1. Revenue, of course, still rose 13% from a year earlier to a record $6.76 billion in fiscal Q3.

And if the slowdown in profit growth persists into fiscal 2027, Citi's concern about next year's estimates could prove right.

A higher earnings target

Earnings per share look stronger, mainly because Adobe continues to buy back its stock. Showing how much the buyback matters, the company's diluted share count shrank around 7% year over year in fiscal Q3, to 395 million. So adjusted earnings per share climbed 15% that quarter, almost twice the growth in adjusted net income.

Management has lifted its full-year earnings goal along the way, too. In December, Adobe's fiscal 2026 adjusted earnings per share target indicated growth of around 12% over fiscal 2025's $20.94. After two hikes, the latest target of $24.45 to $24.50 implies growth of around 17%.

Sure, buybacks can't hide a shrinking business forever. But Adobe isn't shrinking. Management's revenue goal for fiscal 2026 is around $26.6 billion, about 12% above the $23.8 billion Adobe took in during fiscal 2025.

Also, the company still generates billions of dollars in operating cash flow every quarter, which helps fund those buybacks. Operating cash flow was about $2.5 billion in fiscal Q3 alone.

Time to buy?

At around $242, Adobe stock sells for about 10 times earnings, using the midpoint of management's adjusted earnings-per-share goal for the fiscal year ending this month. The S&P 500 (SNPINDEX:^GSPC), in comparison, is valued at nearly 19 times its expected earnings for the next 12 months.

In other words, investors are pricing Adobe like a business whose earnings might stall or even shrink. Citi's $207 target is around 8.5 times earnings on the same basis.

I think the market's too gloomy here. Even if ARR growth drops toward the mid-single digits next year, the buyback alone might keep earnings per share climbing.

The biggest risk is that AI tools let customers do the same work with fewer paid Adobe subscriptions. But Adobe's numbers don't show that kind of decline yet. Its revenue is still growing by double digits, and the ARR from its AI-first products rose more than 150% year over year in fiscal Q3 -- though those products are still a small part of the company.

In the end, Citi might be right that fiscal 2027 estimates are too high. But with shares at about 10 times this year's targeted adjusted earnings, I think Adobe stock already prices in plenty of disappointment. I'd buy the stock now, even if the next few quarters of ARR growth look as weak as Citi expects.

Citigroup is an advertising partner of Motley Fool Money. 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.