Adobe shares have declined 31% over the past twelve months, underperforming the S&P 500's 17.0% return. The drop reflects investor concern over slowing subscription growth, a topic that dominated the question-and-answer session during the company's September 10 earnings call for fiscal Q3 2026.
While Adobe's total revenue grew 13% year-over-year to reach $6.76 billion in the third quarter, a key forward-looking indicator showed weakness. Sales under contract, which signal future revenue, increased by only 8%. According to a question raised on the call, this marked the first time that metric has grown in single digits since early fiscal 2023. Management attributed the softer growth to a deliberate strategy of acquiring new users through free software versions, such as making Student Spaces in Acrobat free worldwide in September, and by holding off on price increases.
This approach has successfully expanded Adobe's user base. Users of the company's free creative apps now number more than 100 million, an increase of over 70% from a year earlier. However, paid growth has not kept pace with this rapid expansion of free users. Annual recurring revenue, which measures the yearly value of subscriptions, was growing at 11.2% at the end of the third quarter. Management's target for full-year growth is 10.2%, indicating an expected deceleration.
The immediate impact of slower growth on Adobe's sales is limited because its subscription base is already substantial. Recurring revenue stood at $27.5 billion at the end of Q3. Each percentage point of growth represents approximately $275 million in annual sales. In a slowdown scenario, Adobe would forgo potential new sales while retaining its existing subscription base. For shareholders, the primary risk lies in valuation rather than immediate revenue loss. Adobe currently trades at 13.1 times earnings, compared to 21.5 for the S&P 500. This multiple suggests the market has already priced in some degree of slower growth. The stock's lowest price-to-earnings ratio in the past decade was 11.4.
Adobe's financial strength remains evident in its cash generation. The company produced $10.6 billion in free cash flow over the last twelve months and maintains net debt of just $1.1 billion. It used $9.3 billion of that cash to repurchase its own shares, an amount equal to 9.7% of its market value. Through these buybacks, Adobe has reduced its share count by 13.4% over three years, with approximately $24.55 billion remaining under its current authorization. Fewer shares outstanding means each remaining share claims a larger portion of profit, potentially allowing earnings per share to rise even if sales growth slows.
The next concrete evidence of Adobe's growth trajectory will arrive with its fiscal Q4 2026 report. Management did not forecast a revenue contraction and actually raised its full-year revenue target on September 10. For the fourth quarter, the company expects revenue between $6.8 billion and $6.85 billion, slightly above the $6.76 billion reported in Q3. Executives stated that sales under contract typically step up in the fourth quarter. If that metric remains in single digits again, the weakness will have persisted for more than one quarter.
Management's own targets show recurring revenue growth slowing from 11.2% to 10.2% by year-end. If actual growth falls below that 10.2% threshold, it would signal that Adobe's large base of free users is not converting into paying subscribers at the expected rate.