Two Software Giants Under AI Fear: Adobe vs. Salesforce Valuation

TL;DR Adobe (market cap $98B) and Salesforce ($150B) are both down about 30% on AI fear. Adobe carries little debt, grew without acquisitions, and earns 27–38% returns on capital. Salesforce carries far more debt (~$70B) and more acquisitions, but its switching costs make revenue much stickier. My midpoint DCF values Adobe near $565 (~22% return) and Salesforce near $355 (~19.5%).

Same fear, different businesses

Adobe and Salesforce both got hammered this year, and for a similar reason — the fear that AI will replace them.

Adobe makes Photoshop, Acrobat, and Illustrator. Most customers pay a monthly subscription, so cash comes in steadily every month regardless of the economy. Yet the stock fell about 30% on the worry that AI image-generation tools could produce designs without Adobe at all.

I see it a little differently. When I've asked some AI tools to do image work, lately they'll sometimes hand it off themselves — 'use an Adobe product like Firefly instead.' And the consistency problems with AI-generated images are still very real. Above all, Adobe's customers are professionals, and the proof is that revenue and profit keep climbing.

Adobe: low debt, growth without acquisitions

Adobe's market cap is $98 billion; enterprise value is $108 billion. That ~$11 billion gap is debt. Free cash flow was $10.3 billion last year against a five-year average of $8 billion. That free cash flow — far above net income — is the real lifeblood of the business. The stock trades at just 9.5x free cash flow.

Returns on capital ran 27% a year over five years and 38% last year. Quarterly revenue over the past two comparable quarters went $5.18B, then $5.71B, then $6.4B — the opposite of a business the market says is getting worse.

The comparison with the all-time high is even more telling. Adobe peaked at $700 in 2021. Back then revenue was $15.8 billion; today it's $24 billion — 50% higher. Profit went from $4.82 billion to $7.21 billion — also 50% higher. The business is clearly better than at its peak, yet the price is far below it. Just as a rising price doesn't justify itself, a falling one doesn't mean the business got worse.

Salesforce: sticky, but heavy

Salesforce is the leader in software that helps companies manage their customers. Once a company builds its operations on Salesforce, switching is very hard and very expensive. That makes revenue sticky. The stock is down over 31% this year — the worst among the big software names — yet the business is still highly profitable and growing.

Market cap is $150 billion, and debt is about $70 billion — far heavier than Adobe. But free cash flow was $15 billion last year (five-year average $10 billion), well above net income. Price to free cash flow is 10.25x, similar to Adobe.

Returns on capital are lower than Adobe's but improving. Profit growth ran 11% a year over 10 years and 12% over five — then jumped to 18.73% last year. Whether that's a one-off or a new plateau is my biggest question, and the heavy acquisition history is worth keeping in mind.

Side by side

Metric	Adobe	Salesforce
Market cap	$98B	$150B
Net debt	~$11B	~$70B
Free cash flow (last yr)	$10.3B	$15B
Price / free cash flow	9.5x	10.25x
Returns on capital	27–38%	Low but improving
Acquisition reliance	Low	High
Switching cost (stickiness)	Relatively low	Very high
Down YTD	~30%	~31%
Midpoint DCF return	~22%	~19.5%

The two are genuinely different. Adobe's subscription is relatively easy to cancel, but it carries little debt, grew without acquisitions, and posts dominant returns on capital. Salesforce carries more debt and more acquisitions, but with an entire sales organization built on top of it, leaving is far harder.

My valuation

Adobe. I used revenue growth of 3/6/9%, free-cash-flow margins of 37/40/43% (the midpoint of 40% matches the last five and ten years), a terminal PE of 18/21/24, and a 9% required return. The result: a low of $375, a high of $844, a midpoint of $565, and about a 22% midpoint return. With a gross margin in the 80s, margins have room to improve as revenue grows.

Salesforce. I used revenue growth of 5/7.5/10%, free-cash-flow margins of 25/30/35%, a terminal PE of 14 low / 18 mid / 22 high (returns on capital are still low, so I can't hand it a big premium), and a 9% required return. Against today's $175, the result is a low of $210, a high of $577, a midpoint of $355, and about a 19.5% midpoint return.

I'm not claiming I'm right. But if I owned 30 names like these — each with limited downside while revenue and profit improve — I'd likely do quite well overall. A few will miss, a few will beat my estimate, and most should land near it. That's the picture I'm after.

If you want where this approach starts, read my 52-week-low hunting playbook first. (Disclosure: I own Adobe. But don't buy it because I hold it. What matters is the process, not the ticker.)