Adobe (ADBE)

By both methods, the value today (DCF $743 · Multiples $465) exceeds the market price ($238).

Today — with margin of safety: at $238 trades ~48.8% below its value discounted to today (~$465) — the wide discount we require (≥38%, equivalent to a ~15% annual return); the risk is covered by the margin, not the rate.

At 5 years — Muy infravalorado: the target price ($580) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years comfortably exceeds the risk-free rate (4.5%) — and the discount reaches the required margin of safety.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($238) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-14.3%/year) than we project (10.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$3.9 bn of owner earnings in year 5 (vs ~$13.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/owner-FCF (flujo de caja libre neto de SBC). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: the base year is the real TTM (revenue $26.0bn, free cash flow $10.6bn at Aug-2026, XBRL) and the projection consists of 12-month windows (+1y…+5y). The metric is owner-FCF net of stock-based compensation: the year-0 cash margin (33.6% of OCF) is net of SBC (~$2.1bn, ~20% of free cash flow, a real cost §3); raw OCF is 41.6%. Today's EV/owner-FCF (~11.3x) compresses as the cash flow compounds (~+10% to ~+7%), anchored in ARR ($27.5bn) and RPO ($22.2bn) contracted. Year 1 (Sep-2026 to Aug-2027) is anchored in the guidance in the September 10, 2026 release: fiscal 2026 fourth-quarter revenue of $6.80-6.85bn (+10.2% at the midpoint; full year $26.576-26.626bn) and a year-end ARR growth target of +10.2%. The window starts at +9.7% (guided fourth quarter, ~+10% in the next two and ~+8.5% in the last, when the April 2026 Semrush acquisition has already lapped), below the +11.1% of the previous path, because the third quarter (+13%, +12% in constant currency) still includes that inorganic contribution; the deceleration continues geometrically to ~+6.6% in year 5. The three FY2027 quarters are analyst assumptions, declared. No dividend: Adobe returns the cash flow through buybacks (~$9.3bn over the last twelve months and $11.3bn in FY2025; ~4.4%/year net share reduction modeled, from 395M diluted shares in the third quarter; the fourth-quarter guidance is ~389M), strongly accretive at the depressed price, modeled in the share path; cash does not accumulate: over the last twelve months buybacks plus the Semrush purchase ($1.87bn) exceeded free cash flow ($10.6bn) and cash stayed flat (~$5.6bn). Watch: disruption of the creative core by generative AI and the CEO's departure.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $580 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $238, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $580 in 5 years and a required return of 4.5% annually, the maximum to pay today is $465. Against the current market price ($238), the margin of safety is 48.8% (trades below the maximum → there is margin) and the total return at that price would be 19.5% annually.

• A single business, one multiple. Adobe is valued as one company (a single segment since FY2026) on EV/owner-FCF net of SBC — the metric that expenses stock-based compensation and captures the real cash.
• Punished by AI fear. It trades at ~11× free cash flow with ARR at a record.
• The buyback amplifies the return. At a depressed price, the buyback (~5%/year) retires more shares per dollar and is strongly accretive — a central engine of per-share value over five years.
• Margin of safety at the end. At $238 the base return (+19%) comfortably exceeds the required average return; the margin of safety is wide if the AI fear is overblown.
• The disconfirmer is binary. The value rests on AI not disrupting the creative core; if it does and owner-FCF declines, the adverse scenario (~10× on a lower flow) leaves the value below the price.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (113%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Strong and predictable cash. Free cash flow (~$10.6bn TTM, ~41% margin) is enormous and predictable (96% recurring); cash conversion is high.
• High return on capital. Return on capital well above the 10% bar (asset-light, high margins, low invested capital) — in the exceptional band of the method.
• Material stock-based compensation. SBC (~$2.1bn TTM) is ~20% of free cash flow (8% of revenue) → material by the cash-flow yardstick (§3): it is expensed in the metric (owner-FCF net of SBC), not added back.
• Net share reducer. Buybacks ($9.3bn over the last twelve months; $11.3bn in FY2025) comfortably exceed stock-compensation dilution → net reduction ~5%/year; at a depressed price, strongly accretive.
• Figma one-off (FY2024). The Figma termination fee ($1,000M) depressed the FY2024 result; it is non-recurring and does not affect FY2025 or the TTM — normalize when comparing year over year.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Adobe's growth is anchored in ARR (annual recurring revenue): it rises through new subscribers, migration to higher-tier plans (Creative Cloud Pro with AI) and price increases. 96% of revenue is subscription, so ARR ($27.5bn) and RPO ($22.2bn contracted) anticipate revenue with high predictability. The new lever is monetizing artificial intelligence (Firefly, generative credits, the Acrobat assistant): AI-product ARR tripled year over year, crossing $500M.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (28-ago-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real growth, not nominal. Yes: ARR grows ~+10% (year-end target: +10.2%) through subscribers, migration to higher-tier plans and price; the currency effect is ~1 point in the third quarter (+13% reported, +12% in constant currency) and the Semrush acquisition contributes part of the growth.
• Where the engine comes from. Digital Media (~74% of revenue, +11%): Creative Cloud + Document Cloud, with ARR as the driver; Digital Experience (~25%, +9%) complements.
• Anchored in contracted ARR and RPO. ARR ($27.5bn) and RPO ($22.2bn) are contracted and lead revenue: a gentle, defensible deceleration, not an extrapolation.
• Realistic deceleration. The base decelerates from ~+10% toward ~+7% by year five: Creative Cloud saturation and competition bite; the peak is not extrapolated and no AI-driven reacceleration is assumed.
• AI monetization (the new lever). ARR from AI products tripled (>$500M) and Firefly surpasses $250M; if AI is incremental demand, it is upside; if it cannibalizes, it is the risk.

• Relevant in 10 years / recurrence. Creation and document software is structural; the unknown is not the relevance of the category but whether Adobe keeps capturing it against generative AI tools.
• Market share / cost. Near-monopoly in professional creation and documents (industry-standard formats); disputed at the edges by Canva/Figma (prosumer) and generative AI (creation from scratch).
• Pricing power. Strong: ~89% gross margin and near-universal renewal evidence the pricing power; the migration to higher tiers (Creative Cloud Pro) and price increases are proven levers.
• Operating leverage. High: asset-light (capex <1% of revenue), 96% recurring revenue — the operating margin holds at ~36% GAAP with scale.
• Capital cycle / competition. AI attracts massive capital into content creation (Midjourney, OpenAI, Canva); it is the main competitive pressure on Adobe's creation moat.
• Behavior in a recession. Critical subscription software is relatively defensive (high renewal), but discretionary spending by small and midsize businesses and creators can give way in a recession.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.1x
• ✓Interest coverage (EBIT / interest)61.8x
• ✕Liquidity (current ratio)0.92×
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 113% of ROIC
• ✓Value creation (ROIC − 10% bar)+20pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.3x — no over-investment
• ✓Float / working capitalFrees up cash $0.4 bn (float / negative WC)
• !Dilution (SBC % of revenue + shares)SBC 8.0% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net cash ~neutral. Cash and investments ~$5.6bn against debt ~$6.4bn (after the Semrush purchase and a $250M repayment in the third quarter) → practically neutral; no worrying leverage.
• Enormous cash generation. Operating cash flow (~$10.8bn TTM) covers minuscule capex (~$0.2bn) and leaves free cash flow of ~$10.6bn: buyback firepower.
• No maturity wall. The debt profile is manageable and cash generation covers it with plenty to spare; no refinancing pressure.
• Disruption risk, not balance-sheet risk. Adobe's risk is not one of solvency but of AI eroding the creation moat — a business risk, not a financial one.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Disciplined buybacks (~$9.3bn over the last twelve months, accretive at the current price) as the main use; the blemish is the failed Figma attempt ($1,000M fee). Semrush ($1.87bn) to be watched.
• Alignment / skin in the game. Professional chief executive of 18 years with <1% ownership; alignment via compensation (97% at risk, >90% in equity tied to total shareholder return) more than through ownership stake.
• Return of capital. No dividend; it returns all its free cash flow in buybacks, reducing shares ~5%/year — the engine of per-share value at a depressed price.
• Leadership transition. The announced departure of chief executive Shantanu Narayen (18 years at the helm) opens a transition to watch — short-term noise and uncertainty of strategic continuity.

• Motivated sellers driven by the narrative: the market punished the multiple on fear that generative artificial intelligence erodes Creative Cloud, not on business deterioration — ARR is at a record while the multiple was cut in half.
• Sector-wide multiple compression: software trades under pressure on fear of AI disruption; Adobe trades at 11× owner free cash flow, with ARR at a record.
• Missing buyers at the bottom of the cycle: a high rate-sensitivity name with a historically rich multiple leaves portfolios when sentiment turns, without the quality of the business changing — the chief executive's departure added short-term noise.

The discount stems from the AI-disruption narrative and the sector de-rating, not from a deteriorating business: ARR reaches $27.5bn (year-end growth target: +10.2%) and RPO $22.2bn, both contracted. The gap between perception (AI destroys Adobe) and operating reality (record ARR, AI ARR tripling) is the source of the opportunity, the archetypal Marks case, with the disconfirmer (disruption of the creative core) made explicit.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -5%/year (-24% total): the margin of safety protects the downside. The bull (+30%/year, +273% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Generative AI disruption. The central risk: prompt-based tools (Midjourney, OpenAI, Google) that lower the skill barrier and erode the need for Creative Cloud — if owner-FCF declines, the value thesis breaks.
• Competition from Canva and Figma. In the prosumer and collaborative segment, they pressure pricing and slow the migration to higher tiers.
• Creative Cloud saturation. With high penetration of the professional base, growth depends increasingly on price and on AI SKUs that do not yet monetize at proven scale.
• Leadership transition. The departure of chief executive Shantanu Narayen (18 years) opens uncertainty about strategic continuity.
• Capital allocation. The failed Figma acquisition ($1,000M fee) and the Semrush acquisition ($1.87bn) are M&A signals to watch.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 30% above the 10% bar, with a +49% margin → a quality business at a good price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 10% at a multiple/growth of 1.1 → cheap for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 30% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -14% vs our 10%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -5%/yr, bull-scenario ceiling +30%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, intangibles, network effects, efficient scale → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -14%, within what we project (10%) — the story squares with the numbers.