Adobe Stock is Dirt Cheap After Its Recent Results - What's the Best Way to Play ADBE?

Adobe Systems (ADBE) reported strong revenue and free cash flow results for fiscal Q3 on Sept. 10. Free cash flow (FCF) margins were over 40% over the past year. ADBE stock is dirt cheap now at less than 10x earnings and 10x trailing 12-month (TTM) FCF. As a result, shorting ADBE puts and put credit spreads work well for value investors.

ADBE closed at $265.60 on Monday, Sept. 14, up from a recent trough of $248.83 on Sept. 10 before the earnings release. However, the chart below from Barchart shows ADBE has been flat for the past month and a half.

This is likely due to investors' fears that some AI company will eat Adobe's lunch and steal its clients with an AI bot or lower pricing structure. So far, that hasn't happened.

Strong Revenue and FCF Results

In fact, revenue for the fiscal Q3 quarter ending Aug. 28, 2026, was up 12.9% YoY and over 2.1% QoQ. 

Moreover, its trailing 12-month revenue (TTM), at $25.97 billion, was 12% higher YoY and 3% higher than last quarter's TTM revenue of $25.198 billion. This data comes from Stock Analysis.

In other words, Adobe is not losing its customer base to AI bots. 

In addition, its pricing structure remains strong, allowing Adobe to generate over 40% TTM FCF margins.

For example, in fiscal Q3, Adobe generated $2.438 billion in FCF, vs. $2.1 billion last quarter, and $2.126 billion last year. This resulted in FCF margins (i.e., FCF as a percentage of revenue) of 36.1%, 31.8%, and 35.5%, respectively.

More importantly, given that much of its FCF comes in Q4, Adobe's trailing 12-month (TTM) FCF this past quarter was $10.5 billion. That represented 40.79% of its TTM revenue. That compares to 40.8% last quarter and 41.4% last year.

In other words, over the past year, its FCF margins have remained strong, despite competition from AI companies. There is every reason to believe this will continue.

Forecasting FCF Based on Analysts' Revenue Projections

For example, analysts surveyed by Seeking Alpha now expect revenue for the year ending Nov. 30, 2026, to hit $26.61 billion, up from $23.769 billion last year. But next year it's expected to rise to $29.05 billion. That's an implied growth rate of 22.2% over 2 years, or 10.1% annually.

Moreover, if we assume Adobe will keep generating 40.8% FCF margins, its FCF will rise to $11.85 billion next year, up from $10.5 billion over the past year.

That implies a 12.9% FCF growth rate over the coming year. This should help push Adobe's valuation much higher.

Price Targets for ADBE

Right now, ADBE stock is trading at a forward price/earnings (P/E) multiple of less than 10x, as analysts project earnings per share (EPS) of $27.66 for next year.

Similarly, its trailing 12-month (TTM) FCF of $10.5 billion represents a 10% FCF yield, as ADBE's market cap is $105.6 billion. In other words, ADBE is 10x its TTM FCF.

So, at 10x, its 2027 $11.85 billion FCF would give Adobe a fair market value (FMV) of $118.5 billion, or 12.2% higher. However, let's assume the market eventually raises this multiple to at least 12x (i.e., an 8.33% FCF yield); here is what ADBE could be worth:

  12x $11.85 billion = $142.2 billion fair market value (FMV)

That is +34.7% over today's market cap of $105.6 billion. This means ADBE stock could be worth between 12.2% and 34.7% more over the next year, or 23.5% more:

  $265.60 x 1.235 = $328 price target (PT)

That's slightly higher than other analysts, as Yahoo! Finance shows that the average of 40 analysts is $279.05, and Barchart's mean survey PT is $268.82.

However, there's no guarantee ADBE will reach these PTs. So, one conservative way to play ADBE is to short out-of-the-money (OTM) puts and do put credit spreads.

Shorting OTM ADBE Puts

For example, the Oct. 16 expiry put option chain shows that the $245 put has a midpoint premium of $4.70, and the $240 put has a midpoint premium of $3.60.

This means the first play is that an investor who posts $24,500 with their brokerage firm can collect $470 in their account by entering an order to “Sell to Open” the $245.00 put.

That works out to a one-month yield of 1.918% (i.e., $470/$24,500), and, if repeated each month for a year, the expected return is 23.0%as long as ADBE stays above $245.00. 

Even if it does, the brokerage will assign the $24.5K collateral to buy 100 shares at $245.00. 

That is a great buy-in price, and it allows the investor to benefit from any upside in ADBE. Moreover, they could also sell covered calls.

However, not all investors have $24,500 to post as collateral for this play. One way around that is to do a put credit spread.

ADBE Put Credit Spread

In this play, the investor executes the short-put trade but also buys a lower put strike price in the same expiry period. That way, the collateral required is limited.

For example, after buying the $240.00 put in the chain above, the investor spends $360 of the $470 already received, for a net credit of $110. So, the net spread is $5, and the collateral is $500. Here is the expected return:

  $110 net credit / $500 collateral spread = 22%

So, for example, if the investor has just $5,000 to invest, they could short 10 contracts at $245 and buy 10 contracts simultaneously at $240. Here is how that works out:

  $4,700 -$3,600 = $1,100 net credit

  $1,100 / $5,000 collateral = 22%

Note, however, that if ADBE falls to $240 on or before, the investor could lose $5,000 in collateral. The net loss would be $5,000 -$1,100, or $3,900. So, the investor will have to close this out or roll it over to a new period, perhaps at lower strike prices, to avoid this. In other words, the risk of loss is much higher than with a short-put play.

However, the upside is huge. For example, if this play is done for 3 months, the expected return is over 66%.

But, given how cheap ADBE is, there is likely a low risk that this would occur, other than a large market event.

The bottom line is that these are two profitable ways to play ADBE stock for value investors each month.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.