The market pounds Adobe (ADBE) stock, while the company outperforms…

Exactly two months ago, we recommended shares of Adobe to our Complete Investor subscribers at $264 per share. Our argument was simple: Wall Street was pricing a great business as if it were going to zero, but the business itself kept getting better. Two months later, the stock is still beaten down, and the business is still getting better.

The narrative that drove shares of Adobe down is that easy-to-create artificial intelligence (“AI”) platforms can make images and designs for virtually no cost… and that will destroy the market for Adobe’s products. ADBE shares have fallen more than 30% from a 52-week high of $376.16 – and now trade at a very-low 10x next year's earnings.

On September 3, Adobe announced that Anil Chakravarthy will take over as CEO on December 1, and longtime CEO Shantanu Narayen will become executive chair. The stock fell almost 7% on the news. Leadership handoffs make investors nervous. But Chakravarthy is an insider, and Narayen isn’t leaving the building. This is not a desperate rescue mission – it’s a clean succession.

But that’s the stock’s performance. The company’s performance is something entirely different. Instead of showing signs of stress, Adobe’s business results are improving. Operating margins are up. Returns on capital are up. Free cash flow is up. Annual recurring revenue accelerated. And the company retired more than 6% of its shares in the last year.

Then on September 11, Adobe reported its Q3 financials, and every number that matters to our thesis moved the right way:

We’ve seen this movie before, and we know how it ends.

Through 2011, Adobe sold software the way everyone sold software. You bought a box that contained the software on a CD. Creative Suite 5 (“CS5”) cost roughly $2,500. You owned it. Adobe booked the revenue in one lump, and then prayed you would pay another $2,500 for the upgrade 18 months later. Half the time you didn't buy the upgrade when Adobe recommended it. You kept running the old version, or you pirated the new one. Piracy was so rampant that Adobe's own executives later admitted the majority of its Photoshop photo-editing installations in some markets were stolen.

It was a good business. Gross margins were near 90%. But it was a lumpy, leaky, low-quality-of-earnings business.

In 2012 and 2013, Adobe did something that looked like corporate suicide. It announced that after CS6, Creative Suite was over, that there would be no CS7, and that the only way to get Photoshop, Illustrator, InDesign, and Premiere going forward was to rent them by the month through Creative Cloud.

There was a full-on offensive against the company. Customers signed petitions. Analysts downgraded the stock. For two years, the financials were dreadful. On paper, Adobe looked like a broken company.

When you stop selling $2,500 boxes and start collecting $50 a month, you blow a hole in your reported revenue and earnings while the subscriber base builds. Operating margin, which had run in the high 20% range, collapsed to 10.4% in fiscal 2013. The price-to-earnings (P/E) ratio, calculated on the depressed earnings, spiked to 101x.

Then the new business model caught up with the old one. Adobe was converting a one-off, piracy-prone box business into a recurring, high-retention, impossible-to-pirate subscription annuity. Every month that passed, more of the revenue became predictable. And soon all was right in the Adobe abode… and what emerged on the other side was one of the great compounding machines of the modern market.

The subscription transition worked so completely that today 96.4% of Adobe's revenue is recurring subscription revenue. The company that Wall Street thought was committing suicide in 2013 went on to 5x its revenue and nearly double its operating margin.

Remember that the next time someone tells you a technology shift is going to kill Adobe. They said it last time. They were catastrophically wrong.

Of course, the most important moat that assures Adobe’s future is the very real cost (and risk) of a business switching a foundational software application… Few successful businesses want to risk disrupting their company’s revenue and marketing channels to save a few hundred bucks on a software license that is critical to company operations.

Price the alternative… a life with no Adobe. Years of project files that don’t convert to new ways of operating, freelancers and partner agencies who can no longer collaborate, templates the studio built over a decade stop working. And for a stretch of months, while the company saves on software seats, output slows and deadlines slip. A single blown campaign for a major client costs more than a decade of Adobe subscriptions. It simply isn’t worth it.

That is the real moat: the switching cost is large enough that no creative director will ever want to do it. Adobe has priced itself precisely into the gap where it is cheaper to keep paying than to think about not paying. That’s a moat that will persist.

Meanwhile, Adobe is doing exactly what we said a great business should do when its stock is mispriced: buying it. The company repurchased about 9.5 million shares in Q3. That’s more than 2% of the share count in three months. Every share Adobe retires below fair value makes the remaining shares worth more. The longer the market stays pessimistic, the more value Adobe captures for shareholders who stay put.

Adobe’s stock is going to be one of the best performing investments of the next decade.

Tell us what you think of today’s Daily Journal: [email protected]

Porter & Co.
Stevenson, Maryland

1. The U.S. federal government has nearly used up the debt ceiling increase. In July 2025, Congress raised the debt ceiling, which is the legal cap on federal borrowing, by $5 trillion to $41.1 trillion. Total federal debt now stands at $40.3 trillion. It rose $2.5 trillion in the fiscal year that ended September 30, the largest one-year increase since the pandemic, in an economy that isn’t in recession. The National Taxpayers Union projects the government will hit the limit by May 2027. Congress will then have to vote again to raise or suspend it. Repeat after us: The spending will never stop.

2. Americans' stock portfolios are worth more than the value of their homes. Household stock holdings reached 106% of the value of primary residences in 2025, up from 28% in 1989. Yet for the typical family, the house is still worth five times the stock portfolio. The gap between the two lines is the wealth effect: the gains in the equity market have gone almost entirely to the wealthiest. That makes consumer spending more exposed to the S&P 500 as the households doing the spending are the same ones who would feel a drawdown first.

3. Wall Street shies away from GPU-backed loans. JPMorgan (JPM) and Goldman Sachs (GS) are leading a $5 billion loan sale for Volta, a new AI cloud startup. Normally, banks will underwrite the full loan and hold it on their balance sheet until they can sell it to investors. But in this case, the banks only guaranteed the $1.3 billion portion of the loan secured by the data center lease – leaving the remaining $3.7 billion, backed by Nvidia (NVDA) high-speed GPU chips, for other investors. This was a rare move, and signaled that Wall Street banks may be losing confidence in the value of loans backed by Nvidia chips.

Shares of pharmaceutical giant Pfizer (PFE) closed at their highest level in two years yesterday. After falling for nearly four consecutive years, the stock is quietly up 43% since putting in a bottom on tariff-related fears in April 2025.

In yesterday’s Journal, Porter explained that the most important thing you have to do with your money, right now, is protect it from inflation. To do that, he shared the details – but not the name – of a company that can help… It collects $10 billion in rent per year but no one thinks of it as a real estate company. It is a master at capital allocation.

Rob K. writes:

Can’t wait till Saturday. I'll be in South Dakota pheasant hunting but we have no cell or internet service out where we go… Can you give the ticker before then?

Christopher R. writes:

Tell me the name now… LOL!

Porter & Co. Comment: Nope. Sorry.

Kevin L. writes:

I always worry about slow growth once a company like the one you mentioned for the Saturday Complete Investor gets so big. Then again, I still remember buying what I think is this company many years ago at $50 and foolishly selling at $55!

Robert R. writes:

In one word… Brilliant!