Adobe Inc. shares trade at 13 times their trailing earnings, a significant discount to the 21.4 times median for S&P 500 companies. This valuation gap follows a 33% decline in the stock over the last twelve months, a period when the broader S&P 500 index returned 16.2%. Investors are currently weighing whether this low price reflects excessive pessimism or underlying business weakness.
The company’s financials suggest the business remains healthy. Adobe generates most of its income through subscriptions for software like Creative Cloud and Acrobat. In the third quarter of fiscal year 2026, subscriptions accounted for $6.56 billion of the company's total $6.76 billion in revenue. Over the last twelve months, Adobe’s revenue grew by 12.0%, outpacing the 8.3% median growth rate of S&P 500 peers. The company also converted 35.7% of its revenue into operating profit, nearly double the 18.6% median for the index.
Cash generation remains a key strength. For every $100 invested at current prices, Adobe produced approximately $11 in free cash flow over the past year. Free cash flow represents the cash remaining after covering operating costs and investment spending. A three-year review supports this picture, showing average annual revenue growth of 11.2%. Revenue increased in each of the last three fiscal years, and while the operating margin has slipped by about 0.5% over the past year, it remains well above levels from three years ago.
However, forward-looking indicators show some softness. Contracted future revenue, which includes deals customers have signed but Adobe has not yet delivered, grew by 8% in the third quarter of fiscal 2026. This lagged behind the 13% growth in recognized revenue during the same period. Management attributed this slowdown to a strategic focus on acquiring new users through free versions of its software rather than raising prices. Executives noted on the earnings call that while price increases might have offered short-term relief, securing new users was deemed more critical for long-term health.
This strategy appears to be working on user adoption. Monthly active users surpassed 1 billion in the third quarter of fiscal 2026, a jump of more than 20% from the previous year. Growth in paid subscriptions also exceeded internal targets, with the yearly value of subscriptions rising 11.2% from a year earlier. This outperformed management's target of 10.2% for fiscal year 2026.
Adobe is nearing the end of fiscal year 2026, which concludes at the end of November. The company targets an operating margin of 35.0% under standard accounting rules for this period. The upcoming fiscal 2026 report will provide further clarity on whether subscription value continues to grow at or above the 10.2% threshold, a key metric for validating the current valuation.