Do you think the market’s refusal to reward Adobe’s record guidance—trading it at a "cyclical value" multiple despite 45% operating margins is a sign that investors have permanently decoupled Adobe from the "Big Tech" cohort, or is this just a classic case of price action lagging behind the actual arrival of AI-driven earnings?
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My view is that this looks like a classic case of the market overreacting due to peak uncertainty surrounding AI disruption. The market is still trying to determine whether AI is structurally positive or negative for Adobe and who the winners and losers in software will be. When uncertainty is high, multiples decline, even if current fundamentals remain strong.
Right now, Adobe is trading more like a mature cyclical software name than a 45% operating margin, double-digit ARR compounder. At the current multiple, investors are pricing in some probability of long-term competitive disruption and margin compression— not disbelief in the current numbers.
Historically, markets tend to overreact to disruption fears and only re-rate once evidence becomes overwhelming in one direction. If AI is proven to meaningfully accelerate monetization (higher ARPU, premium tiers, enterprise upgrades), then earnings will eventually force the multiple to expand. If instead growth slows materially, the current valuation may prove justified.
I lean toward this being a temporary overreaction rather than long-term structural impairment, but I could be wrong.
In the meantime, you’re effectively being paid a “cyclical value” earnings yield for a structurally high-margin, cash-generative business. That asymmetry is what makes it interesting.
Do you think the market’s refusal to reward Adobe’s record guidance—trading it at a "cyclical value" multiple despite 45% operating margins is a sign that investors have permanently decoupled Adobe from the "Big Tech" cohort, or is this just a classic case of price action lagging behind the actual arrival of AI-driven earnings?
I’ve subscribed and would be happy to support each other. :)
Jorrit
Hi Jorrit, that’s a great question.
My view is that this looks like a classic case of the market overreacting due to peak uncertainty surrounding AI disruption. The market is still trying to determine whether AI is structurally positive or negative for Adobe and who the winners and losers in software will be. When uncertainty is high, multiples decline, even if current fundamentals remain strong.
Right now, Adobe is trading more like a mature cyclical software name than a 45% operating margin, double-digit ARR compounder. At the current multiple, investors are pricing in some probability of long-term competitive disruption and margin compression— not disbelief in the current numbers.
Historically, markets tend to overreact to disruption fears and only re-rate once evidence becomes overwhelming in one direction. If AI is proven to meaningfully accelerate monetization (higher ARPU, premium tiers, enterprise upgrades), then earnings will eventually force the multiple to expand. If instead growth slows materially, the current valuation may prove justified.
I lean toward this being a temporary overreaction rather than long-term structural impairment, but I could be wrong.
In the meantime, you’re effectively being paid a “cyclical value” earnings yield for a structurally high-margin, cash-generative business. That asymmetry is what makes it interesting.
Thanks for subscribing!