Counting Hammer Blows

(ADBE), (KO)

“You may feel a slight twinge,” my orthopedic surgeon told me before hammering a horse-sized needle into my hip bone 55 times to extract stem cells for my knees. 

I’m bringing this up because buying Adobe (ADBE) at $255 – down from $699 – feels roughly the same. Painful in the moment, potentially life-extending for your portfolio. 

The company generates double-digit revenue growth and an 11.5% free cash flow yield while Wall Street obsesses over whether ChatGPT can replace Photoshop. 

Spoiler: it can’t. I know because I’ve actually tried it.

Last week, I opened Illustrator’s generative AI feature, curious to see if the panic selling had any basis in reality. The output was cartoonish garbage – the kind of clipart you’d see on a small-town dentist’s website circa 2003. 

To get anything remotely usable for professional work, I would’ve spent more time wrestling with prompts than just creating the asset myself from scratch. This is the technology that supposedly justifies a 62% drawdown in Adobe’s stock price.

The math doesn’t add up. Adobe reported $23.8 billion in revenue for fiscal 2025, up 10.5% from the prior year. 

Management is guiding for $26 billion in 2026, which represents another year of double-digit growth on an already massive revenue base. 

Companies facing existential threats don’t compound at 10% annually. They certainly don’t generate operating cash flows of $3.2 billion in a single quarter while spending only $34 million on capital expenditures. 

That $3.1 billion in quarterly free cash flow annualizes to a yield of 11.5% against Adobe’s current $108.7 billion market capitalization.

You’re getting an 11.5% free cash flow yield from a business that’s still growing revenue in double digits, maintains pricing power in a subscription model with 95% recurring revenue, and sits on a net cash balance sheet. 

Find me another company with that profile trading at these multiples.

The panic stems from a fundamental misunderstanding of how Adobe’s products actually function in professional workflows. 

Tools like Photoshop, Illustrator, and Premiere Pro aren’t simple consumer applications you can swap out like changing your email provider. They’re embedded deep into enterprise workflows, file compatibility systems, and decades of professional muscle memory. 

The switching costs are enormous – not just in dollars, but in retraining, workflow disruption, and compatibility headaches across teams and vendors.

Adobe’s making the smart play by integrating AI into its existing platform rather than fighting it. The company is rolling out AI-assisted features across Creative Cloud, but they’re enhancing professional tools, not replacing them. 

A designer still needs to know composition, color theory, typography, and brand guidelines. AI can generate a starting point or automate tedious tasks, but it can’t replace judgment and taste. 

Adobe’s positioned as the platform where AI and human creativity intersect, which is exactly where it should be.

The financial engineering adds another layer. Adobe spent $11.3 billion on share repurchases in fiscal 2025, reducing diluted share count from 443 million to 417 million – a 6% reduction in one year. 

Share-based compensation runs about $1.9 billion annually, which nets out to $9.4 billion in real buybacks. 

Companies that buy back stock when it’s down 60% from all-time highs are doing exactly what they should be doing. Most do the opposite.

The stock’s trading at prices last seen during the March 2020 COVID crash, except now revenue and free cash flow are substantially higher, and the share count is 12% lower. 

The only other times Adobe traded this cheap were during the 2008 financial crisis and the 2000 dot-com collapse. We’re not in a financial crisis. Credit markets are functioning. Adobe’s customers aren’t defaulting. 

The entire sector’s getting hammered on AI fears that haven’t materialized in any company’s actual financial results.

The forward P/E sits at 11x based on non-GAAP earnings guidance of $23.40 for fiscal 2026, or about 14.4x using GAAP earnings of $18. The difference is share-based compensation, which is real and matters. 

But even at 14.4x forward GAAP earnings with 10% revenue growth, you’re buying a high-quality SaaS business at distressed valuations. 

For context, Adobe traded at 32x forward earnings in early 2024. The multiple compression alone represents a complete re-rating of growth expectations.

The risk is execution and competition. Canva’s gaining ground in the prosumer market, though calling that competition is like saying a lemonade stand competes with Coca-Cola (KO). 

Canva’s for amateurs making Instagram graphics. Adobe’s for professionals producing feature films, magazine layouts, and global advertising campaigns. Different markets, different customers, different price points.

I started buying last week. I’ll add more if it drops further. The setup checks every box – double-digit growth, double-digit free cash flow yield, net cash balance sheet, workflow moat that survives technology shifts, and a 62% drawdown built entirely on fear rather than fundamental deterioration. Adobe’s priced like it’s 2020 but generating 2026 cash flows.

Three days after that stem cell extraction, I sat on an ice pack, second-guessing the whole procedure. Then the swelling went away, and my knees felt better than they had in a decade. 

Adobe holders nursing 60% losses are second-guessing themselves right now. The same principle applies. The swelling fades—the gains compound.