Paul Reacts To Adobe Stock Earnings

Adobe reported strong earnings, with EPS of $5.31 against an estimate of $5.18, and revenue of $5.99 billion compared to an estimated $5.91 billion. This represents about a 10% increase from the previous year, defying concerns that AI would negatively impact the company.

The speaker praises Adobe's high return on capital and minimal debt, noting they made $9.5 billion in free cash flow last year, easily covering their $11 billion debt. Adobe also boasts an impressive 89% gross margin. The speaker emphasizes focusing on cash flow over net income for a truer understanding of a company's financial health, noting that Adobe's stock is undervalued based on its price to free cash flow multiple. The current stock price is half of its 2021 high of $700, and its low for the year was $330.

The speaker believes AI will enhance, not diminish, Adobe's business, predicting continued growth. He stresses the importance of paying a reasonable price for a stock, even for a great company, to ensure a good investment. Adobe is currently positioned as a strong buy by the community, with only one analyst rating it a strong sell.

Adobe’s earnings call highlighted a record revenue of $5.99 billion in Q3 2025, an 11% year-over-year growth. Diluted EPS was $4.18 (GAAP) and $5.31 (non-GAAP). Cash flows were $2.2 billion this quarter, a significant increase from $1.96 billion in the same quarter last year. Projections indicate Adobe could achieve over $10 billion in free cash flow in the next 12 months, making its market cap of $150 billion a 15x free cash flow multiple, suggesting it could be an attractive investment compared to other high-flying companies.

The speaker uses a stock analyzer tool to evaluate Adobe's potential, factoring in 10-year revenue growth projections (4%, 7%, 10%), profit margins (26-32%), and free cash flow margins (38-42%). With a desired 9% return, the tool suggests a low price of $368, a middle price of $540, and a high price of $790. He also discusses using cash-secured puts to get paid to wait for a desired stock price. The video concludes by advising against making impulsive decisions based on single earnings reports, emphasizing a long-term investment perspective.