Adobe at 9x Free Cash Flow — Building the Fair Value From Assumptions, One at a Time

TL;DR Adobe trades at $227, roughly 8.9x free cash flow and 12x earnings. Even cutting revenue growth to 3/6/9% — less than half of what it did last year — and setting free cash flow margins at 37/40/43% against a 10-year average of 39%, the 10-year fair value band comes out at $400 to $890, with a $595 midpoint. The middle case implies a 23% annual return; the most conservative 3% growth case still implies 17.5%.

Feelings don't make you money

The argument over whether AI replaces Adobe or amplifies it cannot be settled on its own terms. Both sides are plausible and both sides are talking about the future. The only way out of that deadlock is to price it.

What I do is straightforward. I blend the story and the numbers into a set of assumptions about the future, then work backwards to what I should pay today if those assumptions hold. Because I know the assumptions can be wrong, I set them low and check whether the math still works.

Here is the sequence.

Step 1 — Start with the price tag

The stock is $227. The all-time high, almost five years ago, was near $700.

Before the share price, I look at market cap: $91 billion. The share price is just market cap divided by share count, so the cap is the more honest number.

Next is enterprise value: $104 billion. The $13 billion gap is essentially net debt.

And here is the comparison that matters. Adobe generated $10.3 billion in free cash flow last year. It earns enough in a little over one year to retire all of its debt. Companies carrying that little debt relative to cash flow are very hard to kill.

No dividend, which I like. The cash goes into buybacks instead, and with the stock this depressed, that is the far better use of it.

Step 2 — Check the quality of the business

Return on capital is 36.7%. I look at this before I touch valuation, because a high return on capital is the signature of a high-quality business with a moat.

Then margins. Gross margin is 90%. Every incremental subscription sold drops 90 cents of every dollar through before overhead and taxes. That matters because it creates pricing power in both directions: if competition forces Adobe to cut price to win business back, it can. A company running a 10% margin has no such option.

Another thing I like: free cash flow exceeds net income. Everyone anchors on earnings, and at 12x earnings the stock is already cheap — but 8.9x free cash flow is the better number, because cash flow is the actual lifeblood of the business.

Finally, the growth record.

Period	Annualized revenue growth
Last 3 years	11%
Last 5 years	11.9%
Last 10 years	17%

The deceleration is real. But I read the three-year number differently than most. The AI boom started more than three years ago, and across those same three years Adobe still compounded revenue at 11% a year. If AI were killing this business, the evidence should already be sitting in that row.

Step 3 — Does it clear the checklist?

Adobe passes all eight of the basic pillars I screen on. It buys back shares consistently, cash flow and net income and revenue are all trending up, it trades at a low multiple, returns on capital are high, and debt is low.

One caveat so this isn't misread: clearing the checklist is not a buy signal. It only confirms this isn't a broken company. The real question is still the same one. Is this the right price?

Step 4 — What analysts are modeling

Consensus has earnings per share going from $24 to $44 over the next seven years, and revenue going from $26 billion to $46 billion.

Annualized, that is high single-digit revenue growth. It is not the old 13-14%. So if you ask whether the business got worse, the answer is yes. It did.

But that is not the chart of a dying business. It is the chart of a company that nearly doubles its earnings over seven years. Which reframes the real question: has the price fallen more than enough to compensate for that deterioration?

Step 5 — Plugging in my own assumptions

This is where judgment enters. I deliberately went lower than the analysts.

Input	My assumption	Reasoning
Horizon	10 years	Long enough to include a full cycle
Revenue growth	3% / 6% / 9%	Less than half of last year, and below consensus
Free cash flow margin	37% / 40% / 43%	The 10-year average is 39%, so a 40% midpoint isn't aggressive
Exit P/FCF multiple	18x / 21x / 24x	A 36.7% return-on-capital business deserves a premium once the AI noise clears
Required return	9%	Used to derive raw intrinsic value before any margin of safety

One more thing I noticed while entering the inputs: returns on capital are improving, not deteriorating. That is a strange metric for a company everyone has declared dead.

About that 9%: it is not the return I want. It is the discount rate for calculating intrinsic value before applying a margin of safety. If 9% were genuinely my hurdle, I should just buy a low-cost ETF instead.

The result — $400 / $595 / $890

On a free cash flow basis:

• Low case (3% growth, 37% margin, 18x): $400
• Mid case (6% growth, 40% margin, 21x): $595
• High case (9% growth, 43% margin, 24x): $890

From $227, the mid case implies a 23% annual return. Even the most conservative 3% growth scenario implies 17.5%.

My own hurdle is 15%. I have real estate and operating businesses elsewhere, so I have no reason to chase a 12% opportunity and can afford to be extremely picky about stocks. On that standard Adobe already clears the bar — and it clears it on the most pessimistic set of assumptions, not the optimistic one.

How not to use these numbers

I am not claiming I am right about Adobe. What I am claiming is closer to this: if I hold thirty companies that look like this, I will probably do well. One calculation does not manufacture one conviction. A repeatable process manufactures a portfolio-level edge.

And every number above falls out of my assumptions. Set revenue growth to 0% instead of 3% and the conclusion changes. Set the free cash flow margin to 30% and it changes again. So the thing to take from that table is not $400 or $595 — it is which assumptions produced them. Until you plug in your own, this is somebody else's conclusion.

I walked through the same method on a different set of names in Price vs. Value: Running Burry's Stocks Through My Own Valuation Process, and I covered how to apply this logic across a portfolio rather than a single name in What It Takes to Buy the Most Hated Stock.

One sentence to close on

Adobe is $227, generated $10.3 billion in cash last year, runs a 90% gross margin and a 36.7% return on capital, and is still growing revenue 13%. The market has priced an apocalypse into that.

The apocalypse could arrive. But I can measure the distance between a decelerating growth rate and a collapsing business, and today's price assumes the second one. That distance is why I'm buying.