Adobe: the business is holding up, but the stock may still need time

Adobe has become cheaper. That is useful. It is not enough.

When a stock falls, the right question is not whether the price is lower than it was a month ago. The right question is whether the new price gives enough compensation for the risks that remain.

With Adobe, that answer is still not clear enough for me.

Start with the business

The operating business still looks strong.

Q1 numbers were better than expected:

— Revenue: $6.40B vs $6.28B expected

— Revenue growth: +12% YoY— Adj. EPS: $6.06 vs $5.86 expected

— Subscription revenue: $6.17B; +13% YoY

— AI-first ARR: more than tripled YoY

— Operating cash flow: $2.96B

— Total ARR: $26.06B

— RPO: $22.22B

— cRPO: 67%

Q2 guidance was also solid:

— Revenue: $6.43B to $6.48B vs $6.43B expected

— Adj. EPS: $5.80 to $5.85 vs $5.70 expected

Segment trends were healthy too:

— Business Professionals & Consumers subscription revenue: $1.78B; +16% YoY

— Creative & Marketing Professionals subscription revenue: $4.39B; +12% YoY

This matters because it tells us that the business is still growing, still generating cash, and still building recurring revenue.

Then move to the stock

A good business does not always mean a good stock at this moment.

The stock price reflects more than the next quarter. It reflects growth expectations, margin durability, competitive pressure, and the discount rate investors apply to future cash flows.

Adobe now faces pressure on all four.

Why the stock can stay weak even after a strong quarter

1) The sector is still being repriced

I wrote earlier that software has been going through a reset in expectations.

That process still matters.

When a sector moves from excitement to skepticism, strong results help. But they do not always stop multiple compression.

That is especially true for companies whose value depends heavily on future cash flows.

2) The cost of capital may still move higher

The macro backdrop has become less friendly.

War risk is back in the headlines. Oil prices have jumped. Inflation fears have returned.

Even if Adobe delivers on revenue and earnings, a higher cost of capital can still push the stock lower. For software companies, valuation often reacts faster than fundamentals.

3) AI changed the debate

Adobe has real AI opportunities. The company is showing progress, and the AI-first ARR number is strong.

But the market is also asking harder questions:

— Will AI accelerate growth?

— Will AI reduce switching costs?

— Will AI create price pressure from cheaper tools?

Those questions are still open. Until the market gets clearer answers, the stock can remain under pressure.

4) Leadership transition adds another variable

After 18 years, Shantanu Narayen will step down as CEO and remain Board Chair.

No successor has been announced. The search is being led by Frank Calderoni, the board’s lead independent director.

The board said:

We are focused on selecting the right leader for this next exciting chapter of the company’s growth and are grateful for Shantanu’s continued leadership as CEO to ensure a smooth transition.

That sounds orderly. Even so, transitions create uncertainty. In the middle of a sector reset, investors usually give little credit for uncertainty.

Why I am still waiting

The lower price has reduced one risk. It has reduced the risk of overpaying relative to where the stock traded before.

But it has not removed the main questions:

— What is the right multiple for software after the rerating?

— How much of Adobe’s AI upside is real and durable?

— How much should I pay for future cash flows in a market with more inflation and rate risk?

— How much extra uncertainty should I accept during a CEO transition?

In other words, the stock is cheaper. The gap between price and value may also be smaller. But I do not yet have enough evidence that the gap is wide enough.

The portfolio test still matters

This is where portfolio construction comes in.

The goal of my recent rebalancing was simple:

— reduce volatility

— reduce exposure to risky assets

— make the portfolio more resilient

Adding Adobe today works against that goal.

Even if the company is high quality, the stock still trades with software sentiment, AI sentiment, and macro sentiment. That makes it a less stable addition than it may look on the surface.

What would change my mind

I do not need perfection. I need better odds.

I would become more constructive if I saw some combination of the following:

— a more stable valuation floor for software — calmer macro conditions and less pressure from rates and oil — clearer evidence that AI monetization is durable — clarity on CEO succession and strategic continuity — a wider margin of safety in the stock price

I previously said that the $270–280 range could become interesting. I still think in those terms. I want the price to do more of the work.

My conclusion

Adobe still looks like a good business.

The current debate is about the stock.

The company is executing well. The sector is being repriced. The macro backdrop is less stable. The leadership transition adds one more question.

That combination can create opportunity. It can also keep the stock weak for longer than expected.

So I am not in a rush.

If I want more stability, for example, Microsoft looks cleaner.

If I want to add to an existing higher-beta position, Amazon is another path.

And if neither offers enough edge, waiting is a valid choice.