Is Adobe (ADBE) Undervalued After a 17.7% One-Year Decline? Assessing Growth, Valuation, and Long-Term Momentum

Adobe Inc. (ADBE) has experienced a sharp correction in its stock price in 2025, with shares down as much as 38% over the past year and falling 24.4% year-to-date. This decline has sparked debate among investors: Is Adobe's stock now a bargain, or is the market signaling deeper concerns about its long-term growth trajectory? To answer this, we analyze Adobe's fundamentals, relative valuation, and strategic momentum, drawing on its latest financial results and peer comparisons.

Fundamental Valuation: Strong Earnings, Attractive Metrics

Adobe's 2025 financial performance underscores its resilience. The company reported Q2 revenue of $5.87 billion, reflecting an 11% year-over-year increase, while annual EPS for 2025 reached $12.43, up 4.7% from $11.87 in 2023. Net income surged 28.24% to $7.13 billion in fiscal 2025, driven by robust operating margins and disciplined cost management. These results position Adobe as a high-margin, cash-flow-generating business, even amid macroeconomic headwinds.

Valuation metrics further highlight its appeal. Adobe's trailing twelve-month (TTM) P/E ratio of 19.96 is significantly below the software industry average of 28.999, while its forward P/E of 15x for fiscal 2026 suggests even more compelling value. A proprietary Fair Ratio benchmark, which accounts for Adobe's earnings growth and profit margins, calculates a fair P/E of 37.8x, far exceeding its current multiple. Additionally, Adobe's PEG ratio of 0.95 (5-year expected) and a forward PEG near 0.7 indicate that the stock is trading at a discount relative to its growth prospects.

However, Adobe's debt-to-equity ratio of 53.43%-well above the industry average of 35.68%-raises questions about leverage. Yet, with trailing twelve-month free cash flow of $9.5 billion and analysts forecasting a rise to $13.3 billion by late 2029, Adobe's liquidity appears sufficient to manage its debt burden while funding innovation and shareholder returns.

Relative Valuation: A Discount to Peers and the Market

Adobe's valuation discount extends beyond its own metrics. Its current P/E of 19.3x is far below the software industry average of 31.8x and the peer group average of 55.6x. A Discounted Cash Flow (DCF) model estimates Adobe's fair value at $579.19 per share, 44.7% higher than its current price, suggesting the market may be underappreciating its future cash flows.

Peer comparisons reinforce this narrative. Adobe's forward P/E of 15x is much lower than the S&P 500 software industry average of 26.93x, while its PEG ratio of 1.39 trails the industry average of 2.05. These metrics indicate Adobe is trading at a meaningful discount to both its peers and the broader market, despite outperforming many in revenue growth and margin stability.

Growth Prospects: AI-Driven Momentum and Risks

Adobe's long-term growth hinges on its ability to capitalize on AI-driven innovation. Q3 2025 results highlighted progress in this area, with AI-enhanced Creative Cloud Pro and AI-driven annual recurring revenue exceeding $5 billion. The company also raised its fiscal 2025 revenue target to $23.5–$23.6 billion, signaling confidence in its ability to scale these initiatives.

Yet challenges persist. Increased competition in AI tools and market skepticism about the sustainability of Adobe's business model have contributed to its stock selloff. While Adobe's operating margins remain among the strongest in large-cap tech, investors must weigh the risks of margin compression in a rapidly evolving landscape.

Conclusion: A Case for Strategic Buy-In

Adobe's fundamentals remain intact, with strong revenue growth, expanding margins, and a valuation that appears disconnected from its intrinsic value. The DCF model's $579.19 fair value estimate and the company's forward PEG ratio of 0.7 suggest significant upside potential, particularly if Adobe continues to execute on its AI-driven strategy.

However, the stock's decline reflects legitimate concerns about competitive pressures and macroeconomic risks. For investors with a medium- to long-term horizon, Adobe's current valuation offers an attractive entry point-but one that requires careful monitoring of its ability to sustain innovation and defend its market leadership.