Adobe Inc. (ADBE) is undervalued, with intrinsic values of $583.12 and $587.72 per share, signaling a Screaming Buy per Buffett and McGrew valuation methods.
In a volatile tech market, Adobe Inc. (NASDAQ: ADBE) stands out as a compelling investment opportunity, with its stock price significantly below its intrinsic value according to two robust valuation methodologies inspired by Warren Buffett and the innovative McGrew approach. As of June 24, 2025, Adobe’s last closing price was $382.34, down 15% year-to-date compared to a 1% gain for the Russell 3000, reflecting market skepticism amid competitive pressures and regulatory scrutiny over its stalled Figma acquisition. However, a deep dive into Adobe’s financials reveals a company poised for growth, driven by its leadership in creative software, digital experience solutions, and AI integration. This analysis leverages five years of financial data to calculate Adobe’s intrinsic value, assess its trailing 12-month (TTM) Return on Equity (ROE) and Return on Tangible Assets (ROTA), and evaluate its position against emerging competitors like Canva.
Valuation Analysis: Buffett and McGrew Methods
Using the Buffett Valuation Method, which relies on discounted cash flow (DCF) principles, Adobe’s intrinsic value is calculated by projecting its free cash flow (FCF) over 10 years and estimating a terminal value. Adobe’s TTM FCF as of February 28, 2025, was $9,192 million, with a 5-year FCF compound annual growth rate (CAGR) of 10.36%, classifying it as a growth stock. Applying a 10% constant growth rate for Years 1–10, a 2.5% perpetual growth rate, and an 8% discount rate (4% Treasury yield plus 4% premium), the total present value of FCF and terminal value is $253.64 billion. Dividing by 434.9 million shares outstanding yields an intrinsic value per share of $583.12. With a 25% margin of safety, the target price is $437.34.
The McGrew Valuation Method, designed for growth stocks, refines this approach by starting with the 5-year FCF CAGR (10.36%) in Year 1 and linearly declining to 10% by Year 7, holding steady thereafter. Using the same 2.5% perpetual growth rate and 8% discount rate, the total present value is $255.55 billion, resulting in an intrinsic value per share of $587.72 and a 25% margin-of-safety price of $440.79. Both methods indicate Adobe is significantly undervalued, as its closing price of $382.34 is 34–35% below the intrinsic values, earning a Screaming Buy status (closing price ≥25% below intrinsic value).
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| ADBE | Buffett Valuation | $583.12 | $437.34 | $382.34 | Screaming Buy |
| ADBE | McGrew Valuation | $587.72 | $440.79 | $382.34 | Screaming Buy |
Financial Strength: ROE and ROTA
Adobe’s profitability underscores its investment appeal. The TTM ROE, calculated as TTM net income of $6.751 billion divided by average shareholders’ equity of $14.278 billion (Q1 2024 to Q1 2025), is a robust 47.28%, reflecting efficient use of equity to generate profits. This aligns with industry reports, such as stockanalysis.com, confirming Adobe’s strong capital efficiency. The TTM Return on Tangible Assets (ROTA), using the same net income divided by average tangible assets of $15.705 billion (total assets minus goodwill and intangibles), is 43.00%. This high ROTA highlights Adobe’s ability to generate earnings from its tangible asset base, despite significant intangible assets typical of software firms.
Adobe’s TTM revenue reached $22.04 billion, with a net profit margin of 31.14% and a gross profit margin of 88.96%, per industry analyses. Its FCF margin remains strong, supporting reinvestment in AI-driven tools like Firefly and Acrobat AI Assistant, which analysts estimate could add $3.5 billion in annual recurring revenue (ARR). The company’s balance sheet shows moderate liquidity (current ratio of 1.18) and a manageable debt-to-equity ratio of 0.50, positioning Adobe to navigate competitive and regulatory challenges.
Competitive Landscape: Canva’s Strategic Move
A key competitive development is Canva’s announced intent to acquire MagicBrief, an AI-powered ad analytics platform, for approximately $10 million, as reported by Citizens JMP on June 23, 2025. Canva, a privately held design platform valued at $32 billion, has gained traction among younger users and small businesses with its user-friendly interface and lower price points. The acquisition of MagicBrief, which enables marketers to track ad performance and analyze competitors, signals Canva’s ambition to expand into analytics and compete more directly with Adobe’s Experience Cloud. With 240 million users and $3 billion in annualized revenue, Canva’s move intensifies pressure on Adobe, particularly in social media marketing, where MagicBrief’s tools could attract professional users. Adobe’s response includes expanding its Firefly mobile app, but Canva’s aggressive acquisitions highlight the need for continued innovation.
Market Context and Risks
Adobe’s stock has faced headwinds, partly due to regulatory scrutiny over its $20 billion Figma acquisition, which remains unresolved and could limit synergies. Emerging competitors like Canva and Figma threaten Adobe’s market share in creative and collaborative design, especially among cost-conscious users. Social media sentiment on platforms like X reflects mixed views, with some investors citing AI disruption risks and simpler alternatives like Canva, while others see Adobe’s diversified portfolio (Creative Cloud, Document Cloud, Experience Cloud) as a long-term strength.
Despite these challenges, Adobe’s fundamentals remain compelling. Its 5-year revenue growth (2019–2024) averages 17.4% annually, and net income growth averages 14.8%, per PitchBook data. The forward P/E ratio of 19.89 and PEG ratio of 1.32 suggest a reasonable valuation for a growth company. Analysts forecast a 12-month price target of $501.26, a 31.87% upside, supporting the undervaluation thesis.
Investment Outlook
Adobe’s intrinsic value, robust profitability, and AI-driven growth make it a standout opportunity at $382.34. The Buffett and McGrew valuations confirm a significant margin of safety, with target prices of $437.34 and $440.79 offering protection against downside risks. While competition from Canva and regulatory hurdles pose challenges, Adobe’s high ROE (47.28%) and ROTA (43.00%) demonstrate operational excellence. Investors seeking long-term value should consider Adobe a Screaming Buy, with potential for substantial returns as AI adoption accelerates and market sentiment improves.
Notes and Limitations
- Data Sources: Financial data was sourced from Adobe’s quarterly financials and balance sheets, with ROE corroborated by stockanalysis.com. Closing price ($382.34) was provided and not independently verified due to lack of real-time data access.
- Assumptions: Used 5-year FCF CAGR (10.36%) for growth projections, average equity and tangible assets over the TTM period, and standard DCF parameters (8% discount rate, 2.5% perpetual growth).
- Limitations: Inability to access real-time data limited price verification. Negative net tangible assets in Q1 2025 amplify ROTA, typical for software firms. Competitive and regulatory risks may impact future FCF growth.
This analysis positions Adobe as a high-value investment, balancing its strengths with competitive realities, and provides a clear, data-driven case for action in today’s market.
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