Adobe (ADBE)

Creative software giant Adobe (NASDAQ:ADBE) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 10.7% year on year to $5.99 billion. The company expects next quarter’s revenue to be around $6.1 billion, close to analysts’ estimates. Its non-GAAP profit of $5.31 per share was 2.5% above analysts’ consensus estimates.

Company Overview

Originally named after Adobe Creek that ran behind co-founder John Warnock's house, Adobe (NASDAQ:ADBE) develops software products used for digital content creation, document management, and marketing solutions across desktop, mobile, and cloud platforms.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Adobe's competitors in creative software include Canva, Affinity (Serif), and Corel, while its document management offerings compete with DocuSign (NASDAQ:DOCU) and Microsoft (NASDAQ:MSFT). In the digital experience space, Adobe faces competition from Salesforce (NYSE:CRM), Oracle (NYSE:ORCL), and SAP (NYSE:SAP).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Adobe grew its sales at a 10.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Adobe.

This quarter, Adobe reported year-on-year revenue growth of 10.7%, and its $5.99 billion of revenue exceeded Wall Street’s estimates by 1.4%. Company management is currently guiding for a 8.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 8.6% over the next 12 months, a slight deceleration versus the last three years. This projection is underwhelming and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Adobe’s billings punched in at $6.19 billion in Q3, and over the last four quarters, its growth slightly outpaced the sector as it averaged 11.6% year-on-year increases. This performance aligned with its total sales growth and shows the company is successfully converting sales into cash. Its growth also enhances liquidity and provides a solid foundation for future investments.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Adobe is efficient at acquiring new customers, and its CAC payback period checked in at 37.8 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Adobe’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 89.1% gross margin over the last year. That means Adobe only paid its providers $10.86 for every $100 in revenue.

Adobe produced a 89.3% gross profit margin in Q3, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Adobe has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 36.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, Adobe’s operating margin rose by 5.1 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Adobe generated an operating margin profit margin of 36.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Adobe has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 41.4% over the last year.

Adobe’s free cash flow clocked in at $2.13 billion in Q3, equivalent to a 35.5% margin. This cash profitability was in line with the comparable period last year but below its one-year average. We wouldn’t read too much into it because investment needs can be seasonal, causing short-term swings. Long-term trends trump temporary fluctuations.

Over the next year, analysts predict Adobe’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 41.4% for the last 12 months will decrease to 40.1%.

Adobe reported $5.94 billion of cash and $6.64 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $11.61 billion of EBITDA over the last 12 months, we view Adobe’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $102 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Adobe beat analysts’ billings expectations this quarter. We were also glad its full-year EPS guidance slightly exceeded Wall Street’s estimates. Overall, this print had some key positives. The stock traded up 4.3% to $365.83 immediately after reporting.

Updated: December 4, 2025 at 9:01 PM EST

When considering an investment in Adobe, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Adobe isn’t a terrible business, but it isn’t one of our picks. To begin with, its revenue growth was uninspiring over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while Adobe’s bountiful generation of free cash flow empowers it to invest in growth initiatives, its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Adobe’s price-to-sales ratio based on the next 12 months is 5.5x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $449.03 on the company (compared to the current share price of $328.84).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.