Adobe is either one of the market’s clearest bargains or one of its biggest value traps.

Bulls see a dominant software franchise trading near its lowest valuation in years. Bears see a decaying business being rapidly displaced by generative AI.

Q3 didn’t settle that debate.

The core business is still growing well, but Adobe is also pushing aggressively into freemium, navigating a leadership transition, and trying to prove that AI adoption can translate into stronger monetization.

Today, I’ll break down the quarter, what actually mattered, and how I’m thinking about Adobe from here.

Let’s dive in.

Disclaimer: This is not financial or investment advice. I'm sharing my personal investment decisions and reasoning for educational and informational purposes. Always do your own research before making any investment decisions.

Adobe is one of the world’s largest software companies, with products spanning creative tools like Photoshop and Premiere, document productivity through Acrobat, and enterprise marketing software through Experience Cloud. In Q3, Adobe delivered another quarter of double-digit growth while continuing to push aggressively into AI and freemium user acquisition. The other major development was leadership, with Adobe naming executive Anil Chakravarthy as its next CEO.

Quarter at a Glance

What Mattered

1/ The Core Franchise Remains Healthy

Adobe’s underlying business remained healthy in Q3, with revenue reaching $6.76B, up 12% YoY in constant currency. Growth remained broad across both customer groups rather than being concentrated in one part of the business.

Creative & Marketing Professionals subscription revenue grew 12% in constant currency to $4.65B, improving slightly from 11% growth in Q2. Management cited continued strength across Creative Cloud Teams and Enterprise, while several newer Experience offerings continued to grow faster than the company overall. Ending ARR for Adobe Experience Manager & agentic web apps, Adobe GenStudio, and Adobe Experience Platform & apps each grew more than 20% YoY. The company also said retention remained strong across its enterprise customer base.

Business Professionals & Consumers remained the faster-growing group, with subscription revenue increasing 15% in constant currency to $1.91B and ARR growing double digits across every geography. Adobe also highlighted its continued expansion of Acrobat beyond its traditional PDF tools into a broader productivity platform.

2/ More Users, Slower ARR

Adobe’s freemium push continued to drive strong user growth in Q3. The company surpassed 1B monthly active users across its businesses, up more than 20% YoY. Creative freemium MAUs crossed 100M, growing more than 70%, while Acrobat + Express surpassed 900M, up more than 25%. Acrobat AI Assistant MAUs also doubled sequentially.

Engagement is beginning to translate into some monetization. AI credit consumption accelerated QoQ across Creative Cloud and Firefly, while Firefly App and credit-pack ending ARR grew 40% sequentially. Adobe’s broader AI-first ARR surpassed $650M and grew more than 150% YoY.

However, that growth has yet to show up meaningfully in Adobe’s overall recurring revenue trajectory. Total ARR growth slowed from 12.5% in Q2 to 11.2% in Q3, while net new ARR declined roughly 37% YoY. Headline ARR also includes the recent Semrush acquisition, suggesting underlying organic growth was likely closer to 9%. RPO growth fell to 8% and cRPO to 9%, pushing both into single-digit territory, with RPO growth at its weakest level since early 2023.

That slowdown is partly the trade-off Adobe signaled last quarter when it made user acquisition its singular focus. Adobe is first bringing users into free experiences, increasing engagement, and then calibrating when and how to convert them into ARR through paywalls and different pricing models. Management again declined to provide a timeline for resuming deferred Creative Cloud pricing actions, instead emphasizing continued user growth and product innovation.

3/ Adobe Names Its Next CEO

After a relatively long search, Adobe named Anil Chakravarthy as its next CEO, effective December 1, with Shantanu Narayen transitioning to Executive Chair after 18 years as CEO. Chakravarthy joined Adobe in 2020 and currently leads its Customer Experience Orchestration business. Earlier in his tenure, he also oversaw enterprise field operations across the company, giving him experience representing Adobe’s broader product portfolio with enterprise customers.

There were also another major leadership announcement. David Wadhwani, President of Adobe’s Creativity & Productivity business, announced he would be stepping down on September 27 and remain as a senior advisor during a transition period. Adobe also has yet to name a permanent CFO following Dan Durn’s departure in June. Steve Day remains interim CFO, and the company provided no update on the CFO search during its Q3 earnings call.

Chakravarthy used the call to begin outlining how he sees Adobe’s next chapter. He framed the company’s next phase around becoming a leader in “agentic software” across creativity, productivity and customer experience. He described combining Adobe’s applications and workflow expertise with conversational interfaces, access to multiple AI models, and customer data and context.

For now, the near-term priorities remain largely unchanged. Chakravarthy said his first focus is closing FY2026 strongly, continuing Adobe’s current strategic initiatives, and preparing for Adobe MAX in November, where the company plans to showcase further innovation across Creative Cloud, Firefly, and enterprise workflows.

Valuation

Adobe trades at 10x forward earnings, near its decade low of 7.5x and well below its historical median of 31x. Consensus expects adjusted EPS to compound around 13% annually through 2028.

For my model, I anchor on $18.12, the low end of Adobe’s FY2026 GAAP EPS guidance. Weighting a bear case ($226) at 25%, a base case ($398) at 50%, and a bull case ($697) at 25% produces a blended fair value of $430.

Applying a 20% margin of safety for slowing organic ARR growth, uncertain AI monetization, and the leadership transition brings that to roughly $344 per share.

My Take

I came away from Q3 feeling broadly the same about Adobe. This was a good quarter, but not one that materially changed the thesis in either direction. The part of the story I have been most confident in, the durability of the core franchise, continues to hold up. Revenue and both customer groups are still growing well, enterprise retention remains strong, and I still don’t see clear evidence that Adobe is being structurally displaced.

The bigger question remains whether Adobe can turn its rapidly expanding user base into meaningful incremental growth. It’s great seeing the company surpass 1B monthly active users, especially when Adobe is competing against an endless wave of new and often free creative tools. But that growth hasn’t yet translated into stronger recurring revenue growth. Underlying ARR and cRPO are both slowing, leaving more than enough for bears to chew on.

Some of that weakness is also self-inflicted. Adobe deliberately deferred Creative Cloud pricing actions last quarter to focus on user acquisition, and those increases likely would have supported ARR growth had they been implemented. I actually do believe the strategy makes sense. Bring users in, innovate aggressively, understand where they’re getting value from AI, and then determine the right paywalls and pricing rather than rushing to monetize and ceding ground to competitors.

The optimistic interpretation is that Adobe is deliberately sacrificing some near-term growth to build a much larger funnel. The more pessimistic possibility is that the proliferation of AI alternatives has reduced how aggressively Adobe can raise prices without increasing churn. We simply don’t know yet. Conversion and monetization are ultimately what matter, but I also don’t expect Adobe to have that figured out overnight after only recently making user acquisition its singular focus.

Anil explained the monetization strategy better later in the call when he talked about monitoring engagement and AI intensity before determining when users are ready to convert. What I still wanted was a rough timeframe. So therefore, for Q4, my focus is less on seeing a sudden monetization inflection and more on Adobe finishing the year strongly, delivering the expected step-up in ARR and RPO, and providing a solid outlook for FY2027. By then, management will have had several more months to evaluate the freemium strategy, and I would expect a more concrete view on when pricing actions and broader monetization initiatives could begin next year.

The CEO transition removes one uncertainty but creates another set of checkpoints. I personally would have preferred David Wadhwani given his background running Adobe’s creative business, but him not being selected isn’t a thesis breaker. I still think promoting internally was probably the right decision for a company of this scale. Anil knows the business and is unlikely to drastically change the strategy, but can still bring a fresh set of eyes. I will say, though, that I felt his first earnings call was a bit disappointing. I liked that Adobe let him take the lead, but several answers were high level and didn’t directly address what analysts were asking, with Shantanu sometimes adding the more useful detail. I’m willing to give him some time given how recently he was selected, but I want more specificity once he formally takes over.

So, what am I doing with Adobe from here? Am I buying, holding, or selling?