An Underdog AI Stock with 70% Upside Potential

Adobe’s stock is very unloved today. Although the company posted its fifth consecutive quarter of revenue upside relative to our expectations, the stock is down 7% since the fiscal third-quarter report in September and off 27% this year. We think the market is overestimating the threat that new, lower-cost artificial intelligence tools pose to Adobe’s dominant content creation software and services. In fact, we think this wide-moat company has reached a turning point where results, AI traction, and guidance are all pointing in the same positive direction. Trading 42% below our $560 fair value estimate, Adobe’s shares look attractive. Adobe is one of Morningstar Chief US Market Strategist Dave Sekera’s 4 Surprising AI Stocks to Buy. It also lands on our list of The Best Tech Stocks to Buy.

Adobe has come to dominate content creation software with its iconic Photoshop and Illustrator, both now part of the broader Creative Cloud. It has added new products and features to the suite to drive the most comprehensive portfolio of tools used in print, digital, and video content creation. The 2021 launch of Adobe Express broadens the company’s funnel, as it incorporates popular features of the full Creative Cloud but comes in lower-cost and free versions. The 2023 introduction of Firefly marks an important AI solution that should also attract new users. We think Adobe is properly focusing on bringing new users under its umbrella, and we believe that converting these users will become more important over time.

Key Morningstar Metrics for Adobe

• Fair Value Estimate: $560
• Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Uncertainty Rating: High

Economic Moat Rating

We assign Adobe a wide economic moat rating arising from switching costs. We believe the company will earn returns in excess of its cost of capital over the next 20 years. The more critical the function and the more touchpoints across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing new software while maintaining the existing platform and retraining employees. There is operational risk in changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take more than a year in bad cases. Finally, lost productivity is likely to be an issue as users learn a new system.

Read more about Adobe’s moat rating.

Fair Value Estimate for Adobe Stock

Our fair value estimate for Adobe is $560 per share, which implies a fiscal 2025 enterprise value/sales multiple of 10 times and an adjusted price/earnings multiple of 24 times. Our outlook for fiscal 2025 and 2026 is largely in line with consensus, which suggests our estimates are not outliers. To support the current stock price, we would have to either cut our growth forecast approximately in half throughout our 10-year discrete forecast or cut our margin estimates by about 1,600 basis points annually. We model a five-year revenue compound annual growth rate of approximately 10%. We expect non-GAAP operating margin, which was 47% in fiscal 2024, to expand modestly on an annual basis, given increased scale.

Read more about Adobe’s fair value estimate.

Risk and Uncertainty

Adobe’s risks vary by segment. Creative Cloud’s large market share means that a significant portion of high-margin revenue would be at risk if a competitor were to make inroads into the space. Cross-selling opportunities with the digital experience business would likely diminish, which would be problematic, as digital experience represents the larger growth opportunity over the next five years, in our view. Adobe has built the digital experience business largely through acquisitions. Any integration missteps could cause delays in new contract signings. Further, material missteps could result in substantial write-downs. We believe Adobe must continue to drive down costs and expand margins to meet investor expectations.

Read more about Adobe’s risk and uncertainty.

Adobe Bulls Say

• Adobe created the content creation software and PDF file editing categories and still dominates them.
• The shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high upfront price for customers. Growth has accelerated, and margins are expanding.
• Adobe is extending its empire in the creative world through the expansion of its digital experience segment, which should drive growth in the coming years.

Adobe Bears Say

• Momentum is slowing in Creative Cloud after elevated growth, which was driven largely by the model transition to software as a service.
• Digital experience is an emerging category and one that Adobe neither created nor dominates. Growth could be slower than we anticipate, or margin expansion may not materialize.
• Digital experience has been built largely through acquisitions. This raises the possibility of disruption from inadequate integration efforts and lends credence to concerns that Adobe may overpay for increasingly large deals.

This article was compiled by Susan Dziubinski and Sylvia Hauser. Data as of Nov. 17, 2025, close unless otherwise noted.