Adobe’s (ADBE) Selloff Isn’t a Buy-the-Dip Opportunity Yet
Adobe (ADBE) has been at the center of a sharp sell-off over the past several months, with shares now down more than 60% from their 2021 peak, but this still doesn’t shape up as a compelling buy-the-dip opportunity. The magnitude of the drawdown is notable, marking one of the steepest declines of this kind within a five-year period.
The slowdown in its core business — arguably facing increasing pressure from artificial intelligence (AI) offerings and competition from more affordable alternatives — and the lack of convincing catalysts to reverse this trend anytime soon are driving the stock lower. At the same time, valuations are now at their lowest levels in the past decade, suggesting potential undervaluation.
Nevertheless, the story today is far less about whether Adobe is cheap and much more about whether there is enough clarity to justify stepping in. The Q1 results were not enough to provide that clarity, and until it emerges, I remain cautious on the stock and maintain a Hold rating.
Adobe shares, having recently traded near the low-$230s and below the $240 mark, are now down roughly 45-50% from their February 2024 peak — and about 60% from their November 2021 all-time high. The two steep drawdowns in less than five years raise questions about whether the market’s reaction to downside risks has been asymmetric relative to the company’s underlying fundamentals.
Behind this current drawdown lies a persistent slowdown in Adobe’s core business, highlighted by the key metric that gauges the health and predictability of its subscription model: Annual Recurring Revenue (ARR). In simple terms, this metric reflects how much Adobe would generate over the next 12 months if nothing changed, based on its current subscriber base.
Over the last eight consecutive quarters — through Q4 FY25 reported this month — Digital Media ARR, which includes the Creative Cloud suite — Photoshop, Illustrator, etc., has continued to grow in the high single-digits and low double-digit rates, but at a steadily slowing pace. Interestingly, since the current record drawdown began in Q1 FY24, Digital Media ARR growth has declined from about 14% year-over-year at $15.5 billion to 11.5% in Q4 FY25, reaching $19.2 billion.
When linking the slowdown in Digital Media ARR with the decline in ADBE shares, the correlation becomes clear — and so does how closely the market is watching this metric.
Then March arrived, and it was time for Adobe to report its Q1 FY26 results. The quarter brought some changes — and they were not well received by the market. The first was a shift in how the company discloses its ARR figures. Adobe only reported Total ARR, combining Digital Media and Digital Experience— the more B2B side of the business, no longer providing individual clarity on how the subscription growth of its core products is trending.
At the same time, Total ARR grew 10.9% year-over-year in Q1 FY26, falling below 11% for the first time since Q1 FY24 — implying that the slowdown in the core business remains meaningful. Management argued that “freemium” initiatives have distorted ARR, and therefore, it should not be used as a standalone metric to assess Adobe as a whole. Instead, the company will shift its focus toward reporting Firefly ARR and monthly active users (MAUs) to provide more visibility into the progress of its AI initiatives — rather than how much AI may be “eroding” the growth pace of its core business.
Adobe also announced the departure of CEO Shantanu Narayen, who has held the role since 2007—although he will remain on the board — while the company searches for a successor. Taken together, these developments reinforce my view that the issue may not lie solely in the slowdown itself, but in the loss of visibility into what is actually happening within Adobe’s core business — especially considering that the change in ARR disclosure does not seem trivial.
Naturally, Adobe’s ultra-bearish momentum has pushed its shares to trade at very low valuation multiples. At just about 14x trailing earnings, this is the lowest level Adobe has seen in at least the past decade. To be clear, the company’s fundamentals aren’t “broken.” It’s simply transitioning from a pattern of double-digit growth to high single-digit growth, while still generating significant amount of cash flow — $10.5 billion over the last 12 months, growing 12% year-over-year, with roughly 90% of that converted into free cash flow. That is undeniably strong.
Even so, the market’s crisis of confidence in Adobe’s core business — which now faces more structural headwinds — and the lack of a clear catalyst to change that perception leave the outlook quite murky.
For this reason, I believe the right approach to Adobe today is not to “buy the dip,” but rather to wait for the dip to stop falling. Looking at technical indicators, such as moving averages, can help frame this. The first relevant signal would be the stock reclaiming the 20-day moving average of about $260, shown by the red line in the chart below, and holding above that level for a few days. From there, a more meaningful bullish signal would be the 50-day moving average denoted by the green line flattening after its current downtrend — suggesting that selling pressure is easing and a base may be forming.
It’s hard to see short-term moving averages converging at these levels unless ARR stops decelerating — or at least stabilizes. Alternatively, the announcement of a new CEO with a clear turnaround strategy could act as a catalyst to shift the narrative from a “falling knife” to a more constructive “buy-the-dip” setup.
There are currently more skeptical analysts than bullish ones when it comes to Adobe’s outlook. Of the 26 ratings issued over the past three months, nine are Buy, 14 are Hold, and three are Sell resulting in an overall Moderate Hold consensus. The average price target is $319.38, implying a potential upside of 35.79% from current levels.
Adobe needs a catalyst to reverse its bearish momentum. A new CEO and a potential turnaround plan could be part of the solution — but for now, that remains highly speculative. The market clearly isn’t convinced that Adobe can continue growing at a high single-digit pace, let alone sustain that growth over time.
Valuations, in my view, look too cheap to justify an outright bearish stance. Still, I would prefer to wait for a clearer signal that momentum is returning to the stock before trying to catch a “falling knife.” For that reason, I maintain a Hold rating on ADBE.
