Fundamentals Say Bet Against the Recent Adobe Downgrade

Key Points

• Adobe's discount will eventually become clear to the rest of the market, where investors can ignore a recent downgrade by Wall Street analysts.
• Fundamentals are as strong as ever, with billions in subscriptions to be collected in the future.
• Despite bearish price action, institutions are buying and are after double-digit upside in this name.

Wall Street analysts often adjust their price targets based on a stock’s momentum and popularity—moves designed more to protect their careers than to reflect true value. They tend to avoid backing underperforming stocks, which makes their targets less reliable during market downturns and periods of volatility.

That’s why strong fundamentals remain essential for making sound investment decisions, especially when considering a contrarian view. One such opportunity may be emerging within the United States technology sector: Adobe Inc. NASDAQ: ADBE.

Adobe shares have fallen 19% year-to-date, dropping to just 64% of their 52-week high—well into bear market territory. Yet the company’s underlying financials continue to strengthen, particularly in one critical metric: free cash flow (operating cash flow minus capital expenditures).

Free cash flow is the lifeblood of any business, and Adobe’s consistent growth in this area suggests long-term value that the broader market appears to be missing. As this cash continues to build, so does the case for a rebound. For investors looking beyond analyst sentiment, Adobe presents a compelling discounted opportunity worth a closer look.

Adobe Positioned as a Defensive Play Amid Market Uncertainty

In its latest quarterly earnings report, Adobe posted net revenue just shy of $6 billion, marking a 12% year-over-year increase. But beyond the topline growth, what truly matters is how that revenue was generated.

With the S&P 500 trading near all-time high valuations, more investors are beginning to question how much higher the market can go. In such environments, portfolios often shift toward stable, predictable businesses—a pattern seen in previous market cycles. Adobe fits that mold perfectly, thanks to its subscription-based revenue model.

Unlike companies dependent on one-time product sales, Adobe collects recurring monthly payments with remarkable consistency. This model not only smooths out earnings volatility but also compounds value over time. One clear indicator of this strength is the $20.4 billion in remaining performance obligations—future revenue already committed through customer contracts. That backlog represents long-term visibility and underscores Adobe’s position as a durable, high-quality compounder in an increasingly uncertain market.

To no surprise, markets are now placing Adobe’s book value at a premium compared to peers. With a 12.8x price-to-book (P/B) multiple, Adobe is above the computer sector’s average of just 7.2x today, meaning that the mentioned preference is already starting to show up.

When it comes to free cash flow, Adobe’s quarter shows $2.1 billion compared to last year’s $1.9 billion. With this new cash available, management decided to inform shareholders that the stock is indeed cheap as of today’s quoted price, which is why they repurchased eight million shares for a total transaction of $2 billion this quarter.

Share buybacks are often implemented when insiders believe the company is trading well below its actual intrinsic value. They also provide existing shareholders with an opportunity to increase their ownership in the stock without having to purchase additional shares out of pocket, thereby demonstrating a genuine vote of confidence moving forward.

What Markets Think of Adobe Stock

Besides the current book value premium, signs of optimism for Adobe include Canada Life Assurance's 20.1% increase in holdings in August 2025, now holding $208.4 million in stock.

Adobe reported $5.31 EPS this quarter, surpassing the MarketBeat consensus of $5.18, suggesting some Wall Street views are conservative. This makes it easier for Adobe to continue beating estimates if financial momentum stays high.

This is why Morgan Stanley analyst Keith Weiss's recent downgrade, from $520 per share to $450, should not be seen as a sign of capitulation. Still, compared to where the stock trades today, this downgraded price target implies a 25% upside potential in the stock.

If bearish momentum and horrible price action still compel an analyst like this one to call for 25% upside, investors can only imagine what the views could be when momentum picks up to reflect Adobe’s actual intrinsic value in the future. Considering that this company plays a crucial role in the global economy's digitization, perhaps a higher premium multiple should be applied to this stock.