Adobe's latest results are a masterclass in one of value investing's most uncomfortable truths: a stock can look cheap at every price on the way down, and still keep falling.

First, the good: revenue growth is re-accelerating, and AI-first revenue tripled. That’s a meaningful signal even if it remains a small fraction of the overall business. Management is also returning substantial cash to shareholders through buybacks, a show of confidence in intrinsic value. And actually, the lower the stock price, the more impact those buybacks will have…

The bad: Adobe still has no permanent CEO. Its CFO is departing for a semiconductor company… an irony that won't be lost on anyone following the AI hardware arms race. And the stock fell another 18% last week, touching price levels not seen since January 2018. Perhaps most telling is that while management is aggressively buying back shares with company cash, not a single executive has stepped in to buy stock with their own money.

The so-so: Adobe's organic Annual Recurring Revenue continues to decelerate; modestly, but consistently, quarter after quarter. Management attributes this to a deliberate strategy: widen the funnel, grow the free tier, delay monetisation. There are two ways to read that explanation:

The investment community has split into two factions, and the debate between them cuts to the heart of what value investing actually means.

The bears draw a historical parallel: Adobe, they argue, is the newspaper industry of the early internet era. Revenues held up for years, and fundamentals looked fine. But the terminal value (the long-run earning power of the franchise) was completely obliterated. AI-native tools and a proliferating set of competitors are doing the same to Adobe today. The market, being forward-looking, is pricing in moat erosion that hasn't fully shown up in the income statement yet. On this view, a low FCF multiple isn't a buying opportunity… it's just a reflection of a business with a shorter runway than it once had.

The bulls counter that the market has overshot. Adobe's valuation is being driven not by evidence of actual customer churn or competitive displacement, but by a narrative; an assumption of inevitable decline that has not yet been substantiated by the data. Moat erosion is being priced as a certainty when it remains, at best, a probability.

Our take: This is a perfect case study of why value investing can be so difficult. Adobe looked cheap at $500. It looked cheaper at $400. It looked cheaper still at $300, and even more so today at $200. The valuation has compressed dramatically at every step, and yet the stock has continued to fall, because investors are not debating the current business. They are debating what the business might become.

None of this means the market is always right. Markets make mistakes all the time. In fact, some of the greatest opportunities in investing come from identifying situations where the market has become too optimistic or too pessimistic.

In the end, it all comes down to the fact that the future is unknowable. Investors get wrecked when a business that is seen as having low uncertainty (like Adobe when it was trading at $600 and a 40x valuation) gets some uncertainty pop up.

But at some point, there has to be a price where it becomes irrational not to buy. It doesn’t matter what the business is or if the moat is weakening. If you can buy Adobe’s cash flows at 1-2x today’s FCF, it would almost be a professional fault not to invest in that.

Let’s take the fantasy even further: if you could buy Adobe’s entire business (generating 8 billion dollars of cash every year) for the price of $1, would you do it? The answer, of course, should be yes. Regardless of the moat, regardless of AI, regardless of the C-suite being in shambles.

So, for Adobe, the real question is how to weigh up the uncertainty against the price you're paying for the business. We would argue that at 10x FCF, not only is the uncertainty being priced in, but you’ve got a decent margin of safety in case things actually turn south.

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