One of two things is happening right now.
Either:
The market is right.
Or,
Adobe just became one of the most mispriced companies in the market.
Yesterday, Adobe reported what can only be described as a monster quarter.
Yet the stock sold off anyway.
Let's look at the numbers.
The AI Narrative Is Working
The market keeps telling us:
“AI is going to kill software”
Adobe's earnings just said the opposite.
Adobe's AI-first annual recurring revenue has now tripled over the last year to more than $500 million.
Not projections.
Not future promises.
Actual recurring revenue.
Meanwhile, management highlighted continued strength across:
• Firefly
• Acrobat AI
• Adobe Express
• Enterprise AI workflows
The company is already monetizing AI while much of the market is still spending billions trying to figure out how.
Revenue Keeps Growing
Adobe generated:
• Record quarterly revenue of $6.6 billion
• Revenue growth of 13%
• Subscription revenue growth of 14%
• Business Professional & Consumer growth of 16%
• Creative & Marketing Professional growth of 13%
Even more impressive:
Adobe raised full-year revenue guidance and EPS guidance.
Companies worried about demand don't raise guidance.
Margins Exploded Higher
This is where things become interesting.
Over the last twelve months:
• Operating margin expanded from 36.6% to 41.1%
• Net income margin increased from 30% to 35%
• Effective tax rate declined from 18% to 14%
In other words:
The business isn't just growing.
It's becoming more profitable as it grows.
That's the exact opposite of what investors should expect if AI is creating competitive pressure.
Adobe repurchased roughly 8.5 million shares during the quarter.
The company continues to shrink the share count while simultaneously growing revenue, margins, and earnings.
That combination is incredibly powerful over long periods of time.
The Quality Metrics Are Ridiculous
Most companies would be thrilled with:
• 10% revenue growth
• 20% returns on capital
Adobe isn't most companies.
Today the business generates approximately:
• 29% Return on Assets
• 75% Return on Equity
• 47.5% Return on Invested Capital
Those are elite numbers.
Very few companies in the world can sustain profitability metrics like these at Adobe's scale.
The Market Is Pricing In Almost No Growth
This is the part that caught my attention.
At today's valuation, the market appears to be pricing Adobe as if long-term revenue growth will slow to roughly 2-3% annually.
Yet today the company is delivering:
• Double-digit revenue growth
• Expanding margins
• Rising AI adoption
• Higher guidance
• Record profitability
Those two realities do not match.
My Updated View
After reviewing:
• The earnings release
• The guidance revisions
• The balance sheet
• The profitability metrics
• The AI adoption trends
I am increasing my valuation range.
My updated estimate is:
• $500 per share on the low end
• $700 per share on the high end
The market currently sees Adobe as a software company threatened by AI.
I increasingly see Adobe as one of the first large software companies successfully monetizing AI at scale.
And that's a very different investment thesis.
Inside Offside Premium, I'll be publishing the full Adobe deep dive including:
• The complete valuation model
• Revenue and margin assumptions
• AI monetization analysis
• Return on capital framework
• Why I believe Adobe could become one of the best quality compounders of the next decade
If Domino's and Nintendo were the warm-up,
Adobe is the sweet dessert, paying for several years of a subscription.