Contrary to fears that AI is creating a valuation bubble in the market, I believe AI is causing specific high-quality companies to be undervalued. There are several enterprise software companies that are trading at a discount due to fears that AI disrupts their business. Many of them have durable competitive moats that AI alone cannot replicate. It is my view that AI may be a growth accelerant to their business, rather than a disruption.
Adobe (ADBE)
Adobe makes industry-standard software for graphic design, photography, video editing, and document management. The company has over 850 million monthly active users. In a survey of ~16,000 creators, 86% said they already use generative AI. In filmmaking, 85% of the films premiering at the 2026 Sundance Film Festival used Adobe software. Adobe’s generative AI platform, Firefly, can generate image, video, and audio. 99% of Fortune 100 companies have used AI in an Adobe app.
Yet, Adobe stock is down ~24% in the past year. Adobe currently trades at ~10x projected earnings. This is a discount relative to the broader software sector.
Adobe’s stock price assumes almost no growth, even in the enterprise business, where its moat is still real.
Adobe’s annual revenue run-rate (“ARR”) of $26-27B is 9-13% of its total addressable market (“TAM”) of $200-300B. The market is not pricing in any share gains from AI for Adobe. The market is betting that rivals (Figma, Canva, OpenAI, Midjourney) capture the AI upside.
The Bear Case
Bears argue AI is eroding Adobe’s per seat subscription model, and that it’s happening faster than Adobe can monetize its own AI tools. It’s also happening without a permanent CEO or CFO in place. CEO Shantanu Narayen announced his exit in March 2026 and CFO Daniel Durn left in June 2026. Neither role has been filled.
Enterprise marketing budgets are under pressure. Customers are switching to AI-generated images. As such, Adobe’s stock photo licensing business is shrinking faster than management anticipated.
Adobe has embedded its creative and document tools inside Microsoft Copilot and ChatGPT. Bears argue this turns Adobe into a commodity plugin, rather than a main platform, giving them less pricing power.
A $150M DOJ settlement with Adobe forces them to simplify the customer cancellation process. This will likely result in increased future churn, reversing Adobe’s historically high customer retention rate.
The Bull Case
Rather than disrupting Adobe’s business, AI could be a growth accelerant. Adobe’s AI revenue is growing rapidly, but still only accounts for ~2% of revenue. Adobe continues to invest in AI, with recent acquisitions such as Topaz Labs. Customers are adding Adobe’s AI solutions on top of existing plans. Adobe’s tools are discoverable inside ChatGPT (900M+ weekly active users) and Microsoft 365 Copilot. This puts Adobe into the hands of a huge software audience without spending its own marketing budget.
Adobe has a few advantages that AI can’t easily replicate.
Technical: Adobe is wired directly into enterprise’s customer records, online stores, and data. Ripping it out would be costly, high-risk, and time consuming. It is not as simple as a subscription cancellation.
Legal: When Adobe’s AI makes a picture, Adobe knows exactly where the source material came from, because they only trained it on stuff they had permission to use. Some other AI tools may have secretly used artists’ work without asking, which means a company using them could get sued.
Data: Enterprises store their brand libraries and campaign history inside Adobe’s products. Adobe can use that to build a custom AI just for that company.
Adobe can afford to be patient. Its cash reserves ($9B+ in free cash flow) and high profits margins (~89% gross margins) enable it to outlast its cash-strapped rivals.
Even if nothing else changes, a strong CEO hire could reset the multiple overnight. Especially a CEO that is well-versed in AI.
What to watch for
The Q3 earnings call will take place on September 10, 2026. Here’s a few things to listen for:
Organic net new ARR: If it’s worse than -10% YoY, this confirms the bear case is playing out.
Firefly/AI-first ARR: does it clear ~$400M and hold its ~50% quarter-over-quarter pace?
Operating margin: does it keep compressing or stabilize?
Also watch for a new CEO to be named. It’s been about five months since the previous CEO announced he is stepping down. I would expect the stock to react well to a credible, external, AI-native hire. If Adobe picks an internal, business-as-usual candidate instead, that’s a bad sign. It probably means the board could not attract outside conviction.