Adobe Analysis 2025.12

Adobe is a global software company best known for its creative and digital media tools, such as Photoshop, Illustrator, and Acrobat. Its subscription-based business model generates recurring revenue and strong cash flows. In this analysis, we examine Adobe’s growth and cash flow profile, profitability, valuation and fair value, and compare its expected return with the broader market to assess its long-term investment appeal.

Estimating the required return (discount rate)

We start by estimating the return investors require for holding the stock. This is done using the Capital Asset Pricing Model (CAPM):

Re = Rf + β × (Rm − Rf)

We use:

• A risk-free rate of 4.116%, based on the current 10-year US Treasury yield
• A beta of 1.54, which measures how volatile the stock is compared to the market
• An equity risk premium of 3.79%, taken from Damodaran

This results in an expected return of approximately 9.95%.
This number is used as the discount rate in the valuation.

Forecasting future free cash flows

Using this growth assumption, we project free cash flow for the next five years:

• 2026: 10.236 billion USD
• 2027: 11.489 billion USD
• 2028: 12.895 billion USD
• 2029: 14.473 billion USD
• 2030: 16.245 billion USD

These projections represent the cash the business is expected to generate in the future.

Discounting future cash flows to today

Money in the future is worth less than money today, so each projected cash flow is discounted back to the present using the 9.95% discount rate.

The total present value of the projected free cash flows from 2026 to 2030 equals 48.52 billion USD.

Terminal Value (Perpetual Growth Method)

To account for cash flows beyond the forecast period, we calculate the terminal value using the perpetual growth formula:

Terminal Value in 2030 = (FCF in 2030 × (1 + g)) ÷ (Re − g)

Inputs:

• Free cash flow in 2030 (FCF2030) = 16.245 B USD
• Perpetual growth rate (g) = 3%
• Discount rate / required return (Re) = 9.95%

Calculation:
Terminal Value in 2030 = (16.245 × 1.03) ÷ (0.0995 − 0.03) ≈ 240.75 B USD

This represents the estimated value of all future cash flows beyond 2030, discounted back to that year.