Adobe Might Have A Stronger Moat Than Investors Expect

Adobe (ADBE) is trading at a relatively low valuation because investors are worried about the threat from AI. Other large software companies are in similar situations right now, but I decided to investigate this one first. Anyway, if you’re not familiar with this company, it makes graphic design software and earns ongoing subscription fees from products such as Photoshop. The bears are worried that this company could be disrupted by AI image-generation apps that cost much less money to use.

Adobe’s 2Q 2026 results do show that its organic growth has slowed down. Its top-line GAAP number might be misleading. Adobe posted 12.7% revenue growth in the quarter as its revenue rose to $6.618 billion, although that includes $480 million in revenue from SEMRush. If you take out the inorganic revenue growth from SEMRush, Adobe’s organic revenue still rose 4.5% from $5.873 billion to $6.138 billion. But its GAAP income only rose 1.2% to $1.712 billion. These numbers might not look impressive for a software company, but Adobe isn’t a startup anymore. Stock buybacks, by themselves, could add more than enough EPS growth to make Adobe a good deal at this price.

I don’t think Adobe is a traditional value trap either. This company still has a moat because its products are better than lower-cost alternatives. That matters for users who are willing to pay up for quality. Additionally, Adobe is using a short-term marketing strategy that sacrifices current revenue for future revenue. However, I still think the best argument that Adobe is undervalued right now is estimating the company’s value the way I’d normally estimate the value of a stock.

Adobe Is Undervalued Based on Standard Financial Metrics

Adobe’s EPS is still rising because of the company’s buybacks, and if I valued it with normal financial metrics, I’d say it looks undervalued. Adobe guided for $24.40 in adjusted EPS at the midpoint in 2026. At a price of $220 per share, it’s trading at a FY2026 P/E of 9. This company also reported adjusted EPS of $20.94 in 2025, so it’s guiding for 16% EPS growth in 2026. So, Adobe has a forward PEG ratio of 0.56 right now. Based on its current guidance, its stock looks like a good deal.

Analysts don’t expect Adobe’s EPS growth to slow down in 2027 either. According to Yahoo Finance, they currently expect the company to post EPS of $27.54 next year. My guess is that that 2027 target is also a non-GAAP number and Adobe’s GAAP EPS will be lower than that, but it looks like analysts are using this company’s non-GAAP EPS to value it right now. Anyway, an increase from $24.40 per share to $27.54 is around 13%. So, it looks like this company is undervalued based on expectations for its performance next year as well. But that’s obvious. What investors are worried about is the threat from AI.

Adobe Could Actually Benefit From AI

Adobe isn’t an anti-AI company, even though bears are worried that it could be disrupted by AI. Its apps come with many AI features that creators are using to make better graphics. But Adobe’s position is that it’s adding AI features to help human creators, not replace them. The artists who use Adobe’s products are sharing their creations in a world where social media platforms are full of AI-generated slop that was not designed by skilled artists. This approach could go over better with creatives who are worried that they could be replaced by AI as well.

So, it’s possible that AI will actually help Adobe generate more revenue in the future instead of reducing the company’s revenue. Adobe’s AI product features could even convince users to select its products instead of lower-cost or free alternatives. In fact, I’ve found some evidence that this scenario might already be happening.

Many of Adobe’s Customers Will Not Switch to Cheaper Apps to Save Money

Before AI apps were available, consumers who couldn’t afford Adobe’s tools could also use open-source tools instead. There have been free, open-source alternatives to Adobe’s apps for a long time, such as GIMP. But recent reviews say that modern versions of GIMP are still not as good as Photoshop. And while open-source apps have improved, enterprise customers often prefer to use the best app rather than the most affordable one.

Adobe is also promoting freemium products such as Adobe Express to sign up new customers who can’t afford to pay for its products right now. The idea is that they’ll upgrade to the professional version of its software later. So, Adobe is giving up some revenue in the short term because it expects to generate more revenue later. As a result, analysts who project Adobe’s future revenue growth based on its Q2 results or full-year estimates for 2026 might be underestimating the company.

This freemium strategy isn’t guaranteed to work because some consumers will never upgrade to the premium tiers of Adobe’s software, so there are some risks here. By making free tiers available, the company might be giving up some revenue forever. But software companies such as Microsoft (MSFT) have been using the freemium model for a long time because it can turn their products into the default choice in an industry. Students who learn to use Adobe’s software in school may need additional training to learn how to use lower-cost competing products, and companies might not want to pay for this training later.

Conclusion

It’s obvious that Adobe looks undervalued based on standard financial metrics right now, but that’s true for companies that are value traps as well. So, it’s worth considering how Adobe will perform in a world where low-cost AI apps are available. I’d say that free alternatives to Adobe’s products have been available for a long time, and that tells me the company’s current customers are willing to pay for better tools. So, I think the bears could be overreacting and Adobe’s stock may be underpriced right now.