Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Adobe Is the Surprise AI Value Play for 2026
Transcript
- Lucas: Let me start with a number that caught my eye this week. Adobe trades at around twenty-five times earnings. That's roughly half its multiple in 2022, and it's cheaper than the S&P 500's average forward P/E of about twenty-two. Luna: Wait — Adobe is cheaper than the overall market? The company that practically owns creative software? Lucas: Exactly. And that's the puzzle. Adobe's stock is down about eighteen percent from its 2021 peak. The market has lumped it in with the old-guard tech that might get disrupted by generative AI. But I think that narrative is wrong — or at least incomplete. Luna: So you're saying Adobe is a value play disguised as a growth stock? Lucas: I think that's exactly what's happening. Look at the product side. Adobe has integrated generative AI into its flagship products — Photoshop's generative fill, Illustrator's text to vector, Premiere Pro's ai assisted editing. They call it Firefly. And they've priced it as a premium add-on. The early uptake numbers are strong. Adobe's management said in their last earnings call that Firefly-based features drove a measurable uptick in subscription attach rates. Luna: But isn't that exactly what everyone is worried about? That tools like Midjourney or Runway will make Creative Cloud obsolete? Lucas: That's the bear case, and it's not unreasonable. But here's the counterargument. Adobe's moat isn't just the software — it's the workflow. Creative professionals have ten, fifteen years of assets built in Adobe formats. Entire studio pipelines depend on round-tripping between Photoshop, After Effects, and Premiere. A standalone AI tool might generate a cool image, but it doesn't replace the production chain. Adobe is embedding AI directly into that chain. Luna: So they're using AI to defend the moat, not just to add features. Lucas: Precisely. And there's another angle. Adobe launched a new product called Adobe Express, which is basically a simplified, web-based design tool aimed at small businesses and social media managers. It competes with Canva. Express has Firefly built in. In their most recent quarter, Express had double-digit million active users. It's early, but it shows they can address a mass market without cannibalizing the professional subscription. Luna: So what's the financial picture? Adobe still generates massive cash flow, right? Lucas: Yes. Adobe generated about eight billion dollars in free cash flow over the last twelve months. That gives them enormous flexibility — they can buy back stock, invest in R&D, or acquire smaller AI startups. They've been buying back shares aggressively; the share count has shrunk by about two percent annually over the last five years. Luna: That's a nice tailwind for earnings per share. But the stock is still down. What's the catalyst to change sentiment? Lucas: I think the catalyst is simply the next couple of quarters of earnings. If Adobe guides revenue growth in the low double digits — say, twelve percent — and shows that Firefly uptake is translating into higher average revenue per user, the multiple should re-rate. Right now, the market is pricing in a worst-case scenario. If that worst case doesn't materialize, the stock could move twenty percent higher without changing the business outlook. Luna: And what about the broader market context? We're in June 2026, and we've seen a rotation out of mega-cap tech into value. Microsoft is down almost six percent over the past five days. Apple down three and a half. Adobe is actually up slightly this week. Lucas: That's a good point. The market seems to be rewarding companies with lower expectations and solid cash flows. Adobe fits that profile. It's not a high-multiple story anymore. It's a steady compounder with an AI kicker. In a world where the S&P 500 is at 7,423 and the Russell 2000 is up three point four percent this week alone, investors are broadening out. Adobe is one of those names that could benefit from that rotation. Luna: Are there any risks besides the obvious AI disruption? Lucas: Sure. One is competition from Canva in the low end. Canva has a huge user base and is adding AI features fast. Another is execution risk — integrating AI across dozens of products is complex, and there could be bugs or user backlash. And there's always the macro risk: if enterprise software spending slows, Adobe's subscription growth could decelerate. But those risks are known. The question is whether they're already priced in at twenty-five times earnings. Luna: So what's your take? Is Adobe a buy here? Lucas: I'd say it's a compelling risk-reward. You're getting a company with a durable competitive advantage, strong cash flows, a shrinking share count, and an AI strategy that's more integrated than most. The valuation is reasonable. If you're looking for a tech stock that isn't priced for perfection, Adobe is worth a serious look. Luna: That's a nice way to put it — not priced for perfection. I think a lot of listeners are tired of chasing high-multiple AI stories. Lucas: If today's conversation helped you think about Adobe — or any stock — a bit differently, that's the whole point. And if you find these episodes useful, the way we keep it ad-free is through listener support. You can find us at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to help us keep digging into these stories without any sponsor pressure. Lucas: Exactly. So back to Adobe — one more thing I want to mention. The company's balance sheet is also very clean. They have about seven billion in net cash. That's a cushion that most tech companies don't have after the pandemic spending spree. Luna: That's a nice tailwind for buybacks and M&A. So Adobe looks like a 'show me' story that could actually deliver. Lucas: I think so. The next earnings report in late September will be the real test. If they show acceleration in digital media revenue, especially from Firefly, I think the bear case starts to crack. And at twenty-five times earnings, you don't need much to go right to make a decent return. Luna: All right, I'm putting Adobe on my watchlist. Thanks, Lucas. Lucas: Happy to break it down. Until next time.