Adobe Drops 40% From 52-Week High: Buy, Sell or Hold the Stock?

Adobe Faces Multiple Challenges: Will AI Push Deliver?

Adobe shares have plunged 36.5% year to date (YTD), underperforming the broader Zacks Computer and Technology sector’s return of 14.3%. The company has been playing a catch-up role in the AI domain, not only against established players like Microsoft MSFT, Alphabet GOOGL, and Salesforce CRM but also from AI-native companies like OpenAI, Midjourney and Canva. 

Shares of Salesforce and Microsoft have dropped 37.6% and 19.4%, respectively, while Alphabet has returned 11.1% over the same time frame. Adobe’s AI-related revenues are minuscule compared with Microsoft, Alphabet and Salesforce. Microsoft’s Intelligent Cloud revenues are benefiting from growth in Azure AI services and a rise in the AI Copilot business. Alphabet’s focus on infusing AI heavily across its offerings, including Search and Google Cloud, has been a major growth driver. Salesforce’s strategy of continuous expansion of generative AI offerings is helping it tap growth opportunities.

ADBE Stock’s Price Performance

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Apart from stiff competition, Adobe’s prospects have been suffering from a leadership transition. The departure announcement of long-term CEO Shantanu Narayan and CFO Dan Durn has added to the investor risk in a challenging macroeconomic and geopolitical environment. 

Adobe continues to post impressive AI usage metrics. AI-first ARR tripled year over year and exceeded $500 million in the second quarter of fiscal 2026. Customer Experience AI ARR grew 4X, Firefly ARR increased roughly 50% sequentially, and Acrobat AI Assistant ARR nearly tripled year over year. However, investors have been skeptical about Adobe’s strategy to prioritize freemium user acquisition over immediate subscription conversions. Adobe plans to remove friction from onboarding by expanding free AI experiences across Firefly, Acrobat and Express instead of pushing users directly into paid Creative Cloud subscriptions. 

Investors remain focused on whether those users convert into meaningful recurring revenue. While Adobe expects stronger lifetime value over time, investors are concerned that monetization may take several quarters. In fact, Adobe lowered second-half ARR growth expectations despite maintaining double-digit overall ARR growth (roughly 10.2%).

Nevertheless, Adobe’s AI push is gaining traction. AI usage has reached record levels across flagship Creative Cloud applications. Creative freemium MAU rose from 50 million to over 90 million while Acrobat and Express MAU increased from 700 million to more than 850 million in the fiscal second quarter. The company’s prospects benefit from growing enterprise demand. More than 1,500 enterprise trials are underway for agentic web offerings while more than 80% of AEP and AEM customers are now using Adobe’s agentic capabilities.

The Semrush acquisition expands Adobe’s Search Engine Optimization (SEO), Generative Engine Optimization (GEO) and Agentic Search Optimization capabilities. Semrush added approximately $480 million of ARR, strengthening Adobe’s marketing platform and creating cross-selling opportunities.

Adobe’s Earnings Estimate Revision Trend Steady

For the third quarter of fiscal 2026, Adobe expects total revenues between $6.67 billion and $6.72 billion. The Zacks Consensus Estimate for revenues is currently pegged at $6.67 billion, indicating 11.38% growth from the figure reported in the year-ago quarter. 

Adobe expects fiscal third-quarter non-GAAP earnings between $6.05 and $6.10 per share. The consensus estimate for earnings is currently pegged at $6.08 per share, unchanged over the past 30 days, indicating 14.5% growth from the figure reported in the year-ago quarter.

Here’s Why Adobe Shares Are a Hold Now

Adobe has a Value Score of B, which suggests the stock is trading at a discount. In terms of price/earnings (P/E), Adobe shares are trading at 8.64X, lower than the broader sector’s 23.95X, Microsoft’s 20.39X, Alphabet’s 23.73X and Salesforce’s 11.52X.

ADBE’s Valuation

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Adobe remains fundamentally strong, supported by healthy enterprise demand, expanding AI adoption and an attractive valuation following the sharp decline in its share price. However, uncertainty around the timing of AI monetization, a slower near-term ARR trajectory, intense competition and ongoing leadership transition could keep investor sentiment cautious. While the company's long-term AI strategy appears promising, clearer evidence that its growing AI user base can translate into sustainable recurring revenue is likely needed before the stock can regain momentum. 

ADBE currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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