Analysis updated to June 2026

Disclaimer

The information contained in this document is for educational and informational purposes only. It does not constitute an offer, recommendation, or financial, investment, legal, or tax advice. The opinions expressed reflect personal analysis and may be subject to change without notice.

Investing in financial markets involves risks, including the potential loss of all invested capital. Each reader or investor is responsible for conducting their own research and, if necessary, consulting with a registered financial advisor before making any investment decisions.

The author assumes no responsibility for any losses or damages arising directly or indirectly from the use of the information presented here.

Introduction

In January 2025, on the White House lawn, Larry Ellison appeared alongside Donald Trump, Sam Altman, and Masayoshi Son to announce Stargate , the most ambitious AI infrastructure project in history. Five hundred billion dollars were earmarked for building data centers across the United States. Oracle, alongside OpenAI and SoftBank, was one of the founding pillars of the project. The image was symbolic: the man who founded a database company in 1977 with $2,000, standing at the White House, committing Oracle as the technological backbone of the AI ​​revolution.

To understand how we got here, we have to go back to the beginning.

Oracle’s story begins in 1977, when Larry Ellison, Bob Miner, and Ed Oates founded Software Development Laboratories in Santa Clara, California. Inspired by an IBM paper on relational databases, they built one of the world’s leading enterprise software companies. Their first contract was with the CIA. Not bad for a three-person startup.

In 1982, the company changed its name to Oracle Corporation, taking the name of its flagship product. By the mid-1980s, Oracle was synonymous with enterprise relational databases. The company went public in 1986 with a valuation of just $31 million and, despite internal crises and accounting setbacks during the 1990s, managed to establish itself as one of the pillars of global enterprise software.

The 2000s were the years of acquisitions. Oracle bought PeopleSoft in 2005 for $10.3 billion in one of the most memorable hostile takeovers in tech history (the battle lasted 18 months), then Siebel Systems in 2006, Sun Microsystems in 2010 (which brought Java and MySQL to the Oracle ecosystem), and dozens more companies. The strategy was to buy competitors, expand the product portfolio, and create an integrated enterprise ecosystem where Oracle was present at every layer of its customers’ technology stack.

The transition to the cloud was late. Amazon launched AWS in 2006 and by 2013 already dominated the cloud market. Microsoft Azure arrived later with force. Google Cloud followed. Oracle tried to build its own cloud too late, with a first generation of infrastructure that couldn’t keep up with the competition. The market punished it. Stocks remained flat for years while hyperscalers grew exponentially.

The turning point was the decision to build OCI Gen2 (Oracle Cloud Infrastructure 2) from scratch, with a different architecture: a flat network with ultra-low latency, isolated security by design (VMs from different customers don’t share hardware), and significantly lower prices than AWS. Clay Magouyrk (now co-CEO) was the architect of that infrastructure, having joined from Amazon Web Services.

And then came AI. Training large language models requires massive-scale GPU clusters with ultra-low network latency between nodes. OCI proved perfectly positioned for that workload, and Oracle signed contracts with Cohere, xAI (Elon Musk’s AI company), Meta, NVIDIA, and finally, OpenAI for Project Stargate. The backlog grew from $55 billion two years ago to $638 billion today.

Oracle was declared dead several times and found a way to reinvent itself from within.

Business Model

Oracle reports its results in three main segments , although to understand the business, I find it more useful to break it down into five major revenue streams. Each has different dynamics, margins, and growth drivers.

1. Cloud Infrastructure (OCI/IaaS)

It’s the fastest-growing business and the one transforming the company’s narrative. Oracle rents computing power in its data centers to customers who need to run workloads in the cloud: from databases to training AI models with billions of parameters.

OCI competes directly with AWS, Azure, and Google Cloud, but with some key differences. First, price: Oracle charges 30% to 50% less than AWS for equivalent workloads, and its data egress (the cost of extracting information from the cloud) is virtually nonexistent, whereas with AWS it can be very significant. Second, architecture: OCI was built with a bare-metal network (hardware without virtualization) that offers extremely low latency, making it especially well-suited for training AI models where GPU nodes need to communicate with each other with minimal latency.

In fiscal year 2026, OCI generated $18.1 billion in revenue (+77% year-over-year) . In the fourth quarter of the fiscal year alone, growth was 93%. The company has 147 active cloud regions worldwide, with another 64 under construction. It is also deploying the Oracle Cloud@Customer initiative : dedicated data centers physically installed at customer premises for those who cannot move their data to the public cloud for regulatory or sovereignty reasons.

The $638 billion Remaining Performance Obligations (RPO) backlog at the close of Q4 FY26 is the most telling indicator of business traction. The majority of that backlog stems from AI contracts where customers prepaid Oracle for the GPUs (or supplied their own). This model dramatically reduces Oracle’s need for financing to build data centers.

2. Cloud Applications (SaaS)

Oracle has two cloud-based ERP (Enterprise Resource Planning) franchises. The first is Oracle Fusion Cloud ERP , which targets large enterprises (Fortune 500 and equivalent) and closed FY2026 generating revenues of approximately $4.2 billion (+18% year-over-year). The second is Oracle NetSuite , acquired in 2016 for $9.3 billion, which serves midsize businesses and generated approximately $4.1 billion in FY2026 (+16%).

Also within the SaaS sector is Oracle Health (Cerner’s business, acquired in 2022 for $28.3 billion). Oracle Health is the electronic health record provider for thousands of hospitals in the United States and around the world. Ellison’s strategy is to transform Oracle Health into the platform that integrates clinical patient data with AI models to accelerate diagnosis and drug development. It’s a long-term commitment that is still undergoing a transformation.

SaaS as a whole generated $15.9 billion in FY2026 (+11% year-over-year) . Growth is more moderate than that of OCI, but the fundamental characteristic of this business is its very high recurrence : contracts are annual or multi-year, the churn rate is very low, and customers tend to expand their use of Oracle over time (what is called positive net dollar retention in the industry).

3. Software (License Support & Cloud License)

This is Oracle’s historical business and still its largest source of revenue in absolute terms: $24.5 billion in FY2026 . It includes two components. The first is on-premise license support : customers who purchased Oracle database or application licenses years ago and pay an annual fee (typically 22% of the original license price) to receive updates and technical support. This business is a money-making machine, with extremely high operating margins and minimal marginal costs.

The second component is new on-premises licenses , which are declining as customers migrate to the cloud. This is expected and welcomed by Oracle: every customer migrating from on-premises to the cloud goes from paying for license support to paying for SaaS subscriptions or OCI consumption, generally at a higher cost.

4. Hardware

As a legacy of the Sun Microsystems acquisition, Oracle sells servers (Exadata, SPARC) and storage. With $3.1 billion in revenue in FY2026 , this segment is not strategic but is profitable for customers who prefer dedicated infrastructure in their own data centers. Growth was modest (+5%) and is not a driver of the investment thesis.

5. Services

Consulting, implementation, and education. With $5.7 billion in FY2026 (+10%) , this segment complements the rest of the portfolio and helps customers implement Oracle solutions. Margins are lower than software, but the business acts as a lubricant for the sales cycle.

Business Quality

Revenue and growth analysis

Oracle’s sales evolution clearly shows the change of stage the company is going through.

Between 2017 and 2022, Oracle was a moderately growing company. Its revenue increased from $37.792 billion in 2017 to $42.440 billion in 2022, reflecting slow expansion for a technology company. During that period, the business remained heavily reliant on its installed base, licenses, support, enterprise applications, and databases, with a gradual transition to the cloud, but without a visible leap in consolidated growth.

The first turning point came in 2023, when revenue grew 17.7% year-over-year to reach $49.954 billion . Part of that surge was due to the consolidation of Cerner, but it also marked the beginning of a more cloud- and recurring services-oriented Oracle. From then on, the company began to show a clearer acceleration compared to the previous stage.

In 2024 and 2025, growth remained positive, albeit more normalized, with sales of USD 52.961 billion and USD 57.399 billion , representing growth rates of 6.0% and 8.4% , respectively. These years are significant because they demonstrate that Oracle’s growth was not solely driven by a single acquisition, but rather that it began building a larger revenue base with greater exposure to the cloud.

The most significant figure comes in 2026. Oracle reached USD 67.357 billion in revenue, with a year-over-year growth of approximately 17% . This acceleration is key because it no longer responds solely to the integration of Cerner, but also to the increasingly strong growth of Oracle Cloud Infrastructure (OCI) and the demand for infrastructure for artificial intelligence.

Oracle has gone from being a mature software company with low growth to one that once again has a history of structural growth. The difference is that this new growth doesn’t come without a price: it’s associated with a very aggressive expansion of capital expenditures, data centers, GPUs, energy, and cloud capacity .

Therefore, the sales chart must be interpreted in conjunction with the evolution of free cash flow. Demand is emerging, but the key to valuation is whether Oracle can convert that growth into margin, return on capital, and sustainable cash flow . On the plus side, the company retains a very valuable characteristic: more than 85% of its revenue is recurring, which gives it uncommon visibility, even within the technology sector.

The revenue mix is ​​systematically shifting toward the cloud. Three years ago, the cloud represented less than 40% of total revenue. Today, it exceeds 50%. In the fourth quarter of fiscal year 2026, the cloud (IaaS + SaaS) already accounted for 52% of total revenue for that quarter, with OCI driving this acceleration. The trajectory is clear.

Business seasonality exists but is moderate. Oracle, following the enterprise industry norm, tends to report its best numbers in the fourth fiscal quarter (ending in late May), when customers’ IT budgets are depleted and contract closings accelerate. The first quarter of the fiscal year (June-August) is typically the weakest.

Revenue evolution by segment (FY2024-FY2026)

Vertical analysis

Income Statement

The vertical analysis of the income statement shows a company that continues to have a profitability structure well above the market average, although with clear signs of change in its business mix.

Between 2017 and 2022, Oracle maintained a gross margin close to 80% , a typical level for an enterprise software company with a very strong installed base, recurring revenue, support, licensing, and high-margin products. During those years, the gross margin remained fairly stable, fluctuating between 79% and 81% , reflecting the quality of Oracle’s historical business.

However, a more pronounced compression begins to emerge in 2023. The gross margin falls to 72.9% in 2023 , then to 71.4% in 2024 , 70.5% in 2025 , and finally 65.8% in 2026. This decline should not necessarily be interpreted as a structural deterioration of the traditional business, but rather as a consequence of the changing business mix. Oracle is increasingly expanding into cloud infrastructure , data centers, and artificial intelligence—businesses that are more cost-intensive than pure software.

Oracle may be entering a much more attractive growth phase, but with lower gross profitability. The company is shifting part of its historical software focus toward a more infrastructure-intensive model.

On the positive side, it managed to offset some of that pressure with greater operational efficiency. Selling, General & Admin expenses fell from nearly 24% of sales in 2017-2020 to 14.8% in 2026 , while R&D remained relatively stable at around 15-17% of sales. This shows a company that continues to invest in product, cloud, and artificial intelligence, but at the same time is making better use of its scale.

The result of all this is that the operating margin remained surprisingly strong. Oracle had operating margins of over 35% for much of the 2017-2022 period, fell to 27.4% in 2023 due to the impact of Cerner and other integration costs, but then recovered to 29.8% in 2024 , 31.3% in 2025 , and 33.3% in 2026 .

This recovery in operating margin is a positive sign. Despite the decline in gross margin, Oracle managed to protect operating profitability quite well through scale, efficiency in commercial expenses, and a lower relative weight of some operating items.

Further down the income statement, interest expense remains a significant line item. In 2026, it represented 6.8% of sales , indicating a more leveraged balance sheet structure. This is a crucial point, as Oracle is funding a substantial infrastructure expansion, which underscores the importance of monitoring debt, financing costs, and return on invested capital.

Finally, the net margin closed 2026 at 25.4% , a very high level for a company in the midst of an investment phase. This confirms that Oracle remains a company with extremely high operational quality. However, for valuation purposes, the net margin alone is insufficient. It’s not just about how much it earns on the books, but how much of that profit can be converted into free cash flow after the capital expenditures necessary to sustain OCI and the artificial intelligence infrastructure.

Balance Sheet

The balance sheet shows a profound transformation in Oracle’s asset structure: it went from having a much lighter balance sheet, with a significant proportion of cash and financial investments, to one increasingly loaded with physical assets, cloud infrastructure and debt.

The first significant change is in the composition of current assets. In 2017 and 2018, Oracle had a very high position in cash and short-term investments , close to 49% of total assets . This reflected a very liquid balance sheet and a company with strong financial capacity. However, that proportion fell significantly over time. By 2023, cash and short-term investments represented just 7.6% of assets , and although they rose to 12.2% in 2026 , the current balance sheet no longer resembles the cash-rich Oracle of the past decade.

The most significant change appears in net property, plant, and equipment . This line item went from representing only 3.9% of assets in 2017 to 49.5% in 2026. This is probably the most relevant figure in the entire balance sheet. Oracle is transforming into a much more capital-intensive company. The expansion of OCI, data centers, artificial intelligence infrastructure, and the physical capacity needed to fulfill cloud contracts are changing the nature of the business.

This point directly connects to the investment thesis. Oracle can no longer be analyzed solely as an asset-light software company. A growing portion of its value and risk lies in its ability to efficiently develop physical capital. If these assets achieve high utilization levels and good returns, Oracle can create significant value. Otherwise, the balance sheet may become heavier without generating the expected free cash flow.

The same shift is observed in the relative weight of goodwill. In 2023, it represented 46.3% of assets , influenced by the acquisition of Cerner, but by 2026 it had fallen to 23.8% . This wasn’t because it disappeared, but because physical assets grew much faster. Oracle’s balance sheet is ceasing to resemble that of a purely asset-light company.

On the liabilities side, debt remains a key factor. Long-term debt represented 46.7% of assets in 2026 , while capital leases reached 10.2% . This shows that Oracle is financing a significant portion of its expansion with debt and infrastructure-related obligations. The company still has scale, profitability, and access to capital, but the margin for error is smaller than when the business was leaner and generated abundant free cash with less need for reinvestment.

Another relevant point is the evolution of equity. For several years, net worth was very low or even negative, partly due to aggressive share buybacks and a leveraged capital structure. By 2026, equity has improved to 16.5% of assets , but this remains a low proportion relative to the size of the balance sheet and the expansion of physical assets.

Accounts payable also increase as a percentage of assets, rising from less than 1% in the early years to 4.2% in 2026. This may reflect increased investment activity, equipment purchases, and greater operational scale. However, I wouldn’t assume that Oracle will be able to finance its expansion indefinitely with suppliers. For valuation purposes, I prefer to normalize this line item prudently.

Cash Flow Statement

Vertical analysis of cash flow is probably the most important for understanding Oracle’s current situation. The income statement shows a profitable company, and the balance sheet shows a company undergoing transformation, but cash flow reveals the truth: Oracle generates a lot of operating cash, but capital expenditures are consuming an increasing portion of that cash .

Historically, Oracle has had an exceptional cash conversion rate. Between 2017 and 2021, cash from operations represented approximately 33% to 39% of sales —very high levels consistent with a high-quality enterprise software business. During those years, capital expenditures were low, generally between 4% and 5% of sales , which allowed for very high free cash flow.

Therefore, between 2017 and 2021, free cash flow remained at very solid levels, close to 30% to 34% of sales . That was classic Oracle: high margins, low capital intensity, recurring revenue, and plenty of cash available for share buybacks, dividends, acquisitions, or debt reduction.

The situation began to change in 2022 and accelerated sharply in recent years. By 2023, capital expenditures (capex) already represented 17.4% of sales . In 2024, this figure dropped to 13.0% , but in 2025 it rose sharply again to 37.0% . Finally, in 2026, capex reached 82.6% of sales , an exceptionally high level.

This figure summarizes Oracle’s turnaround better than any other. The company continues to generate operating cash flow; in fact, in 2026, cash from operations was equivalent to 47.5% of sales , a very strong level. But capital expenditures were so large that free cash flow ended up being negative, equivalent to 35.2% of sales .

This difference between operating cash flow and free cash flow is at the heart of the valuation. Oracle doesn’t have a demand or accounting profitability problem. The challenge is that, to capture the opportunity in OCI and artificial intelligence, it needs to invest massively before reaping the benefits.

This also explains the increased financing. In 2026, Oracle issued debt equivalent to 73.4% of sales and preferred stock equivalent to 7.4% of sales . The infrastructure expansion is not being financed solely with operating cash flow, but also with access to capital markets. In this context, the company retains significant operating cash flow, but a much larger portion of that cash is now being allocated to infrastructure development.

For valuation purposes, I believe this justifies giving more weight to the perpetuity method based on free cash flow than to the EBITDA multiple method. EBITDA may appear very high in a larger-scale Oracle, but if the company needs to continue investing tens of billions of dollars annually to maintain its infrastructure, the true value depends on the free cash flow remaining after that capital expenditure.

The cash flow statement reveals two realities simultaneously. The first is positive: Oracle remains a cash-generating machine. The second is more challenging: the new phase of artificial intelligence is absorbing a massive amount of capital.

Ratios

Liquidity ratios

Liquidity ratios show a company that consumed part of its financial flexibility as it accelerated its transformation to cloud and infrastructure.

Between 2017 and 2020, Oracle maintained a current ratio above 2x , reflecting a balance sheet with ample cash and short-term investments. But from 2021 onwards, liquidity began to tighten, reaching levels of 0.72x in 2024 and 0.75x in 2025 .

In 2026, an improvement is observed: the current ratio rises to 1.12x , the quick ratio to 1.01x , and the cash ratio to 0.76x . This is a positive sign, although Oracle no longer has the same excess liquidity it had during its more asset-light phase. With OCI growing and capex at record levels, liquidity is once again a key variable.

Solvency ratios

The solvency ratios clearly show what we have been seeing: the company remains profitable, but its capital structure is much more leveraged than that of a typical software company.

The long-term debt-to-equity ratio was high for almost the entire period analyzed, but it became particularly distorted in the years when accounting equity was very low or negative due to share buybacks and debt accumulation. Therefore, some ratios, such as debt-to-equity or financial leverage, should be interpreted with caution, as the denominator can exaggerate variations.

I find it more useful to look at debt-to-assets and debt-to-EBITDA ratios. The debt-to-assets ratio remained high, rising from 43% in 2017 to a peak of nearly 69% in 2022 , before gradually moderating to 59.7% in 2026. Although the recent trend shows some improvement, the absolute level remains high.

The debt-to-EBITDA ratio is also relevant. Oracle’s debt-to-EBITDA ratio rose from 3.66x in 2017 to levels close to 4.5x-4.9x between 2021 and 2026, closing the last year at 4.92x . For a mature software company, this level of leverage would be considered high. The market tolerates it in part because Oracle has recurring revenue, a very strong installed base, and high operating cash flow. However, in the current context, with extraordinary capital expenditures on OCI and artificial intelligence, the margin for error is smaller.

Interest coverage remained reasonable, although far from the more comfortable levels of the past. It fell from over 7x in 2017 to 4.88x in 2026. This is not a sign of immediate stress, but it does show that financial costs are having a greater impact on the earnings structure.

Performance ratios

Performance ratios show that Oracle still retains a very strong capacity for operational cash generation, even amidst a profound business model transition.

Cash flow to revenue : Between 2017 and 2021, Oracle generated cash from operations equivalent to approximately 33% to 39% of its sales , an extraordinary level characteristic of a high-quality enterprise software company. In 2022, it fell to 22.5% , but then recovered to 34.4% in 2023 , 35.3% in 2024 , 36.3% in 2025 , and finally 47.5% in 2026 .

This last piece of data is very significant. Oracle doesn’t have an operating cash flow problem. In fact, the company showed exceptional operating cash conversion in 2026. The problem arises later, when that cash is compared against the capital expenditure needed to expand OCI and the artificial intelligence infrastructure.

Cash return on assets remained relatively stable, hovering around 12% in recent years, and closing 2026 at 12.2% . This shows that, despite strong asset growth, Oracle is still able to generate a significant amount of operating cash flow from its asset base. However, this ratio will be key to monitor in the coming years. If the asset base continues to grow due to data centers and GPUs, but the CFO does not keep pace, return on assets could deteriorate.

Cash return on equity should be interpreted with caution, because Oracle’s book equity was distorted for years by share buybacks, debt, and relatively low equity. I wouldn’t consider it a primary metric of economic quality.

Activity ratios

Oracle has historically been a software business with a relatively high turnover of fixed assets, but the expansion of OCI is changing that dynamic.

The most important ratio is fixed asset turnover . In 2017, Oracle generated revenue equivalent to 7.11x its average net fixed assets. This level was consistent with an asset-light software model, where revenue grew without the need for large physical investments. However, this ratio steadily declined to 0.52x in 2026 .

This decline is one of the clearest signs of Oracle’s structural shift. The company is accumulating a massive base of physical assets, data centers, cloud infrastructure, equipment, and artificial intelligence capabilities. In the short term, these assets are growing faster than the revenue they generate, which is why fixed asset turnover is falling so sharply.

This isn’t necessarily a bad thing. During a construction phase, it’s normal for asset turnover to decline. The question is whether Oracle will be able to increase the utilization of that infrastructure and convert those assets into high-return revenue. If it fails, the balance sheet will be burdened with underperforming assets.

Total asset turnover also declined, closing 2026 at 0.26x , compared to levels close to 0.34x-0.39x in previous years. This confirms that the balance sheet has become heavier. Oracle needs increasingly more assets to generate each dollar of revenue.

Regarding accounts receivable, days sales outstanding remained relatively stable, around 48 to 56 days , closing 2026 at 56 days . This is reasonable for an enterprise company with large corporate clients. I don’t see this as a serious sign of deterioration in collections, although it is advisable to monitor whether the growth in RPO and large contracts is accompanied by overly lenient commercial terms.

Payable days rose sharply to 129 days in 2026 , likely reflecting the scale of infrastructure, equipment, and cloud-related vendor purchases. This temporarily helps working capital, as Oracle is able to finance part of its expansion through vendors. However, I wouldn’t assume this level is sustainable indefinitely. In a DCF scenario, it’s more prudent to normalize it gradually.

Inventory is not a significant driver for Oracle. Although the ratio shows a very high turnover in 2026, this has little economic impact because the company does not operate like a traditional industrial business.

Profitability ratios

Oracle remains very profitable, but returns on capital are starting to compress as it becomes more asset-intensive.

Operating ROA remained in double digits for much of the period, but fell to 9% in 2026. This reflects the rapid growth of the asset base due to infrastructure expansion, while the profitability of those assets is still maturing.

Net ROA remained relatively stable in recent years, hovering around 6% to 7% , and closing 2026 at 7% . For a company undertaking such an aggressive capex cycle, this is not a bad level.

ROE is extremely volatile and should be interpreted with caution. Oracle has had years of very low or even negative accounting equity due to share buybacks, debt, and capital structure, which distorts the ratio. ROE is projected at 40% in 2026 , but I wouldn’t use this number as the primary indicator of quality. It’s useful as a benchmark, but not as a core metric.

The most relevant ratio for me is ROIC . Oracle went from very attractive levels, such as 18% in 2019 , 17% in 2020 and 2021 , and even 23% in 2022 , to 15% in 2023 , 15% in 2024 , 14% in 2025 and 11% in 2026 .

This drop in ROIC is probably the most important indicator in the profitability segment. Oracle continues to generate positive returns, but invested capital is growing much faster due to the expansion of OCI. In the short term, this is putting pressure on ROIC. The million-dollar question is whether this decline is temporary, typical of an investment phase, or whether it reflects that the cloud infrastructure business will have lower returns than Oracle’s historical performance.

The answer is crucial. If ROIC expands again as the infrastructure is better utilized, the current investment can create significant value. But if ROIC remains near lower levels, Oracle could grow considerably without necessarily generating the economic return the market expects.

In summary, the vertical analysis and ratios show Oracle in the midst of a transition. The company remains highly profitable, with high operating margins and strong operating cash flow, but the model has changed: it’s no longer just asset-light software; now it also encompasses cloud infrastructure, data centers, and artificial intelligence.

This is reflected in the decline in gross margin , the sharp increase in property, plant and equipment , the pressure on free cash flow , and the lower ROIC . Oracle retains a very high-quality core business, but now needs significantly more capital to grow.

Management Team

Larry Ellison (Founder, Chairman and CTO)

You can’t talk about Oracle without talking about Larry Ellison. The man is the company, the company is the man. At 81, he remains the largest shareholder (with approximately 40% of the shares), the greatest strategic asset, and the mastermind behind every significant move of the last five years.

Ellison grew up on the South Side of Chicago from poverty, attended college twice without graduating, and arrived in Silicon Valley in the 1960s with the ambition to build something big. What he built was the world’s second-largest software company by revenue, with a personal fortune that, at some point during the Q3 results in September 2025, briefly made him the richest person on the planet.

His leadership style is direct, competitive to the point of aggression, with a tolerance for risk that sometimes unsettles Wall Street analysts. He owns the Hawaiian island of Lanai, competes in offshore sailing, and on earnings calls speaks with the conviction of someone unafraid to make extraordinarily ambitious predictions. In Q3 of FY2026, he projected that OCI would reach $144 billion in revenue by 2030. That was interpreted by some as exaggerated and by others as a vision that Ellison himself is determined to execute.

As CTO, Ellison leads product strategy and data architecture. His current obsession is to transform Oracle into the unified health record system for global healthcare: a platform where every patient’s medical records worldwide are available to physicians and AI models that will accelerate the development of personalized drugs and therapies.

Clay Magouyrk (Co-CEO)

Magouyrk joined Oracle in 2014 directly from Amazon Web Services and was one of the key architects of OCI Gen2. He knows the cloud infrastructure business inside and out: he understands why AWS is where it is, and also where its weaknesses lie. In September 2025, when Safra Catz moved to an Executive Vice Chair role, he was promoted (along with Sicilia) to the position of CEO. His focus is on the infrastructure business, data center expansion, and relationships with major AI clients.

Mike Sicilia (Co-CEO)

Sicilia joined Oracle through the acquisition of Primavera Systems and built his career leading the company’s vertical application businesses: healthcare, banking, communications, utilities, and hospitality. His signature has been the integration of AI agents into Oracle’s industrial application suites, transforming enterprise management software into platforms that not only record data but also act upon it.

Safra Catz (Executive Vice Chair)

Catz led Oracle from 2014 (first as co-CEO alongside Mark Hurd and from 2019 as sole CEO) until September 2025. Born in Israel, she trained as an investment banker and joined Oracle in 1999. Her tenure was marked by financial discipline, the execution of major acquisitions (Cerner), and the stabilization of the business during the transition to the cloud. Her continued presence on the board as Executive Vice Chair alongside Ellison speaks volumes about how much the company values ​​her.

Competitiveness

Industry and market size (TAM)

Oracle operates in multiple large and growing markets. The cloud infrastructure (IaaS) market is currently valued at around $250 billion annually and is growing at approximately 25% per year. By 2030, the most conservative projections place it above $600 billion. The cloud ERP (enterprise resource planning) market is estimated at $90-120 billion and is growing at 15% annually. The healthcare IT market is another $40-60 billion market and is undergoing rapid digitalization.

The most important catalyst for all these markets in the coming years is AI. Every company on the planet is trying to understand how to integrate AI language models and agents into its operations. Oracle, which owns both the infrastructure (OCI) and the enterprise applications (Fusion ERP, NetSuite, Oracle Health), is uniquely positioned to offer an integrated solution: the customer doesn’t have to choose between the cloud and enterprise software; Oracle gives them both.

The moat: why customers don’t leave

The concept of switching cost is central to understanding Oracle. Oracle databases have been storing the most critical data of the world’s largest companies for decades: accounting records, customer data, inventories, medical records. Moving that information to another system is not only expensive in terms of licensing or technical migration. It’s risky in a way that CIOs are simply unwilling to accept.

The magnitude of that lock-in is extraordinary. Oracle has over 40% market share in relational databases . By 2024, it surpassed SAP as the world’s largest enterprise ERP provider for the first time ever, with $8.7 billion in ERP revenue and a 6.6% share of the global market. That may seem small as a percentage, but in absolute terms, it’s number one.

The multicloud strategy is another key element of the moat. Oracle has partnered with AWS, Azure, and Google Cloud to deploy Oracle Database directly within its competitors’ data centers ( Oracle Database@Azure , Oracle Database@AWS , Oracle Database@Google Cloud ). This might seem contradictory (why help the competition?), but it’s actually brilliant: Oracle continues to collect its database license fees even if the customer chooses a third-party cloud. And at the same time, it makes Oracle Cloud Interface (OCI) the easiest option for migrating the most demanding workloads.

Growth Drivers

1. The demand for AI infrastructure: Large language models continue to scale. Training GPT-5 or equivalent models requires tens of thousands of GPUs running in parallel for weeks. OCI is currently one of the few providers capable of delivering that scale with the required network latency.

2. Migration from on-premises to the cloud: Oracle has thousands of customers who still run their databases and ERP applications on their own servers. The pressure to migrate to the cloud (reduced operating costs, automatic updates, AI integration) is growing. Each migration means higher revenue for Oracle Cloud.

3. Oracle Health as a healthcare data platform: Ellison’s vision is to build a unified repository of clinical data that will enable AI models to accelerate drug discovery and improve diagnosis. If this project materializes within the next five years, Oracle Health could become one of the most valuable technology companies on the planet.

4. Geographic and sovereign expansion: Oracle Cloud@Customer enables the deployment of cloud infrastructure in countries and organizations that cannot export their data. This is a unique value proposition compared to North American hyperscalers, especially in Europe and Asia.

5. AI embedded in SaaS applications: Fusion and NetSuite are being equipped with AI agents that automate accounting, supply chain, and human resources processes. This gives them greater pricing capabilities and reduces churn.

Porter’s Five Forces

Customer bargaining power: LOW/MEDIUM. Enterprise customers have low bargaining power once they are within the Oracle ecosystem. Migrating an Oracle database that has been running a company’s critical processes for 15 years is a multi-year project with enormous operational risk. Bargaining power is somewhat higher in new OCI contracts, where customers can compare prices with AWS and Azure.

Supplier bargaining power: MEDIUM. Oracle relies on NVIDIA for GPUs in its data centers. NVIDIA’s concentration in the AI ​​chip market gives it considerable power. However, Oracle has signed long-term agreements and is developing relationships with alternative manufacturers (AMD, Intel) to reduce this dependence.

Threat of new entrants: LOW. Barriers to entry in the enterprise software and cloud infrastructure market are extremely high: decades of product development, billions in capital expenditures, a massive installed base, and deep institutional relationships. A startup cannot replace Oracle Database.

Threat of substitute products: MEDIUM. In databases, open-source products (PostgreSQL, MySQL) and NoSQL (MongoDB) have gained ground in modern applications. But for the most critical enterprise workloads, Oracle remains the standard. In the cloud, native services from AWS, Azure, and GCP compete with OCI.

Competitive rivalry: HIGH. In cloud infrastructure, competition with Amazon, Microsoft, and Google is intense. In ERP, SAP remains the major historical rival. But Oracle has the advantage of being able to compete on integrated layers that its competitors cannot easily replicate: infrastructure + database + enterprise applications in a single ecosystem.

SWOT Analysis

Strengths: Extensive installed customer base with exceptional switching costs. Leadership in enterprise databases (40% market share). Unique position at the intersection of cloud infrastructure and enterprise applications. OCI architecture designed for AI workloads. Competitive pricing (30-50% less than AWS). $638 billion backlog providing unparalleled visibility.

Weaknesses: High debt (over $100 billion). Negative free cash flow in FY2026 due to the investment cycle. OCI has only ~3% global cloud market share compared to AWS’s 29%. The Cerner integration has not yet generated the expected returns. Dependence on on-premises revenues, which are in structural decline.

Opportunities: AI as a super-catalyst for cloud infrastructure demand. Migration of thousands of on-premises customers to the Oracle cloud. Oracle Health as a global health data platform. Sovereign expansion in Europe, the Middle East, and Asia. Multicloud as an entry point to OCI for AWS and Azure customers.

Threats: Slowdown in AI investment if the industry’s capital expenditure cycle cools. Competition from Amazon, Microsoft, and Google with much larger financial resources. Dependence on NVIDIA for GPUs. Risk of execution issues in the accelerated construction of data centers. Potential regulatory problems regarding data concentration (especially in healthcare).

Main Competitors

Amazon Web Services (AWS): The market leader in cloud infrastructure with approximately 29-30% global market share. Cloud revenue is around $105-115 billion over the past twelve months. AWS has the greatest depth of services, the largest developer community, and the largest number of enterprise customers. Its disadvantages compared to OCI are its higher price, network latency for intensive workloads, and data egress costs.

Microsoft Azure: The second largest in the market (~20% share), benefiting from integration with OpenAI and Microsoft 365 products. Oracle’s relationship with Azure (Oracle Database@Azure) is unique: they are both competitors and partners. Azure grew by approximately 30% in the last year, primarily driven by demand for AI.

Google Cloud: Third in the market (~13% share) and the fastest growing among the Big Three. Google’s competitive advantage lies in its expertise in AI/ML and its data ecosystem (BigQuery, Vertex AI). It also shares a competitor/partner dynamic with Oracle.

SAP: The long-standing rival in enterprise ERP. SAP has a massive installed base (over 400,000 customers in 190 countries) and has been running its own cloud migration with SAP S/4HANA for years. The Oracle vs. SAP ERP battle is one of the longest-running and most interesting in the enterprise world. Oracle surpassed SAP in ERP revenue for the first time in 2024.

Salesforce: A competitor in CRM and, increasingly, in enterprise AI platforms (Agentforce). It doesn’t compete directly in databases or infrastructure, but it does compete in the SaaS application segment.

Valuation

Valuing Oracle today is considerably more difficult than valuing the Oracle of its history. For many years, the company was viewed as a mature enterprise software company with recurring revenue, high margins, low capital expenditures, and relatively predictable cash conversion. That Oracle still exists, particularly in databases, applications, support, and long-term relationships with large corporate clients.

But the Oracle I’m valuing today isn’t exactly the same. The company is undergoing a major transformation, driven by the growth of Oracle Cloud Infrastructure , the demand for AI computing, and massive contracts with customers who need data center capacity, GPUs, networking, power, and storage.

How much of that growth will actually translate into free cash flow for the shareholder ?

That’s the key, in my opinion. Oracle may show very strong revenue growth, an impressive backlog, and OCI expansion, but if capturing that opportunity requires investing tens of billions of dollars annually in infrastructure, value creation will depend on the ultimate return on that investment.

Projection horizon

For Oracle I use a model of 10 explicit years + terminal year .

I divide the projection into three stages:

2027F to 2030F: aggressive expansion stage, with high growth and exceptionally high capex.

2031F to 2033F: transition stage, where OCI continues to grow but begins to improve operational efficiency and infrastructure utilization.

2034F to 2036F + terminal year: stage of greater maturity, with more moderate growth, more stable margins and capex as a percentage of sales more normalized.

Revenue growth

In the base scenario, I project very high revenue growth in the first few years, especially due to the increasing weight of OCI and the contracted RPO. Oracle closed FY2026 with an RPO of approximately $638 billion , a figure that reflects very strong future demand and justifies assuming several years of growth above the company’s historical average.

In my base scenario, revenue grows 32% in 2027 , then 38% in 2028 , 35% in 2029 , and 26% in 2030. From there, I assume a gradual normalization to a terminal growth of 4% .

This assumption does not imply that Oracle will grow at extraordinary rates forever. The idea is to reflect that the company has a very strong growth window ahead, but that this growth should moderate as the revenue base becomes much larger.

In the best-case scenario , I assume Oracle executes its AI infrastructure expansion very well, converts RPO into revenue with minimal delay, and manages to capture a significant share of global spending on accelerated computing. In that case, growth remains higher for a longer period.

In the worst-case scenario , I assume demand exists, but there is also increased competition, delays in capacity deployment, lower utilization, price pressure, or less profitable contracts than expected. In that scenario, Oracle continues to grow, but the growth rate slows down more rapidly.

Gross margin

Gross margin is one of the most important inputs to the model because Oracle is changing its business mix.

Traditional Oracle, associated with software, licenses, support, databases, and enterprise applications, can sustain very high margins. However, OCI and AI infrastructure are more asset-intensive businesses. They require GPUs, data centers, electricity, networking, cooling, maintenance, technology upgrades, and a physical scale that did not exist to the same degree within Oracle’s historical model.

Therefore, in the base scenario, I don’t assume that Oracle will indefinitely maintain the gross margin profile of a pure software company. I project a gross margin of 68% in 2027 , declining to 67% in 2029 and 2030 , before gradually recovering to 70% in the final year .

The initial decline reflects the increasing weight of OCI and the associated infrastructure costs. The subsequent recovery reflects greater scale, better utilization of data centers, greater absorption of fixed costs, and a still relevant mix of software, applications, databases, and support businesses.

In the best case , the terminal gross margin reaches 72% , which implies that Oracle manages to maintain a very profitable mix between software and cloud, with good pricing discipline and operational efficiency.

In the worst case , the terminal gross margin is 64% , reflecting a less profitable OCI, greater competitive pressure, and an AI infrastructure that consumes more resources than expected.

EBIT margin

I also project the EBIT margin with a transitional logic.

In the base scenario, Oracle starts with an EBIT margin of 36% in 2027F , falls slightly to 35% in 2028F and 2029F , and then gradually improves back to 35% in the terminal year .

This trajectory attempts to capture two opposing forces.

On the one hand, Oracle maintains highly profitable businesses with strong recurring revenue, a deep installed base, and a difficult-to-replace enterprise ecosystem. This gives it a superior profitability structure compared to most pure infrastructure companies.

On the other hand, the expansion of OCI implies a more operationally cumbersome company. Selling incremental software is not the same as building and operating data centers for artificial intelligence models. Therefore, although Oracle may remain very profitable, I don’t think it’s prudent to assume it will fully recover the economic profile of the more asset-light Oracle.

In the best case scenario , the terminal EBIT margin reaches 40% . This scenario assumes very solid execution, significant scale in OCI, good capacity utilization, and a revenue mix where software, applications, and databases continue to be substantial.

In the worst case , the terminal EBIT margin is 28% , reflecting a company that is growing, but with lower returns, greater competitive pressure, and a less attractive operational conversion.

CAPEX

Capex is another of the most relevant assumptions in the entire valuation.

Oracle closed FY2026 with an exceptionally high level of capital expenditure, driven by the need to build infrastructure for OCI and AI customers. Furthermore, the company anticipates that FY2027 will be another year of very high investment.

Therefore, in the base scenario, I use a capex equivalent to 78% of 2027 sales . It’s a very high number, but necessary to reflect the company’s current reality. Oracle isn’t simply selling more software. It’s building physical capacity to fulfill cloud and artificial intelligence contracts.

From there, I project a gradual normalization: 58% in 2028F , 42% in 2029F , 32% in 2030F , and then a progressive decrease to 13% in the terminal year .

I don’t assume Oracle will return to low capex as a percentage of sales. Even in the final year, I maintain a significant capex level because a mature OCI will still require maintenance, hardware upgrades, GPU replacements, capacity expansion, power, cooling, and networking.

This point is central to the thesis. If Oracle becomes a much larger AI infrastructure platform, it will also be a more capital-intensive company. That doesn’t mean it can’t create value, but it does mean that free cash flow needs to be analyzed more carefully.

In the best-case scenario , capital expenditures (capex) decrease faster because Oracle achieves greater efficiency, better utilization, and higher financing or economic contributions from customers. In the worst-case scenario , capex remains high for a longer period, reflecting a more expensive infrastructure, lower efficiency, or a constant need for reinvestment to maintain competitiveness.

Working capital

For working capital, I use unified assumptions for all scenarios because I don’t believe they are the primary driver of the difference between best, base, and worst case estimates. The main variables that explain the value dispersion are revenue growth, margins, capex, and terminal multiple.

For accounts receivable, I use approximately 55 days , which is consistent with the profile of an enterprise company with large contracts and corporate clients. Oracle sells to governments, large corporations, and hyperscalers, so I don’t expect an extremely short collection cycle.

I maintain a low assumption regarding inventory. Oracle is not a traditional industrial company and should not be modeled as having structurally relevant inventory. While there may be certain components or equipment associated with infrastructure, inventory is not the primary economic driver.

In accounts payable, I use a gradual normalization from high levels to more stable levels. Oracle likely maintains some negotiating power with suppliers due to the scale of its purchases, but I don’t want to assume it can indefinitely finance its expansion with exceptionally favorable terms. At such a high capex stage, this assumption should be tempered.

WACC

I use a WACC of 9.76% . It’s a demanding WACC for a company of Oracle’s caliber, but I believe it’s reasonable. Oracle has global scale, recurring revenue, a very difficult-to-replace installed base, and highly profitable software businesses. All of that would justify a relatively moderate cost of capital.

However, today’s Oracle also carries more risk than its historical predecessor. The company is making a very large infrastructure bet, with more debt, more capital expenditure, greater reliance on data center execution, and increased exposure to the profitability of artificial intelligence contracts. Furthermore, it competes against companies with stronger balance sheets, such as Microsoft, Amazon, and Google.

For this reason, I don’t use an excessively low WACC. In the model, the WACC combines a high cost of equity, a target capital structure with a higher proportion of equity than debt, and a relatively moderate after-tax cost of debt. The result is 9.76% , which aims to reflect both the quality of the business and the additional risk associated with this new investment phase.

I prefer to be cautious with the WACC because Oracle’s valuation is heavily dependent on future cash flows. The further away the monetization of current capex is, the more important it is to discount those flows with a rate that accurately reflects execution risk.

Terminal growth

For the perpetuity method, I use a terminal growth rate of 2.5% .

This assumption is conservative and aims to prevent the terminal value from being artificially inflated. Oracle may continue to grow above GDP for several years, especially if OCI gains scale, but assuming an excessively high rate of growth in perpetuity doesn’t seem prudent.

The final year already represents a much larger Oracle, with a revenue base far exceeding its current one. Therefore, I prefer to use long-term growth close to the nominal growth of a mature global company, but without assuming overly aggressive perpetual expansion.

This assumption also balances the model. In a company with high capex and a long transition period, raising the growth terminal too much can lead to a valuation that relies excessively on distant assumptions. I prefer value to come from a reasonable combination of explicit growth, margin recovery, and cash conversion.

EBITDA multiple terminal

In addition to the perpetuity method, I use an EBITDA multiple exit method as a market contrast.

In the base scenario, I use a terminal multiple of 12x EBITDA . In the best case, I use 15x , and in the worst case, 9x .

The 12x base multiple is intended to reflect a mature, profitable Oracle with a much larger cloud platform, but also a more capital-intensive Oracle than in the past. I wouldn’t value it as a pure software company with extremely high margins and low capex. But neither would I value it as a traditional data center company, because Oracle will continue to have software, applications, databases, support, and enterprise relationships that are very difficult to replicate.

That said, the EBITDA multiple method has a significant limitation in this case: EBITDA does not account for the capex needed to sustain the infrastructure .

That point is key. If Oracle reaches its final year with very high EBITDA, but still needs to invest tens of billions of dollars annually to maintain and upgrade its AI capabilities, the EBITDA may overestimate the true economic value. Therefore, in this valuation, the EBITDA multiple method is not the primary approach. I use it as a secondary benchmark, useful for comparing with how the market might value a mature Oracle, but not as the core basis for the target price.

Result by method

• The perpetuity method yields the following values ​​per share:

Best Case: USD 335

Base Case: USD 195

Worst Case: USD 24

• The EBITDA multiple method yields significantly higher values:

Best Case: USD 581

Base Case: USD 288

Worst Case: USD 35

The difference between the two methods is important and, in fact, tells a large part of Oracle’s story.

The perpetuity method penalizes cash conversion more severely because it’s based on free cash flow—that is, the money remaining after taxes, reinvestment, working capital, and capital expenditures. In a company entering a much more capital-intensive phase, this method seems conceptually more relevant.

The EBITDA multiple method, on the other hand, looks at a metric prior to capital expenditures. This can be useful as a market benchmark, but it can also inflate the value if it is not properly adjusted for the investment required to maintain data centers, GPUs, power, cooling, and networking.

That’s why I don’t assign the same weight to both methods.

Target price

To arrive at my target price, I use a weighting of 80% for the perpetuity method and 20% for the EBITDA multiple method .

The reason is simple: at Oracle, the critical point is not how much EBITDA the company can generate in 2036, but how much free cash flow can remain after sustaining its new infrastructure base.

In the base scenario, the perpetuity method yields a value of USD 195 per share , while the EBITDA multiple method yields USD 288 per share . Weighting both methods, the resulting base value is approximately USD 214 per share .

To round things off, my target price base for Oracle is:

USD 215 per share

With a current price of around USD 184 per share , this implies an approximate upside of 17% .

Conclusion

At these levels, the stock seems interesting to me for long-term investors who are confident in the company’s execution and are willing to tolerate several years of high capital expenditures. However, I would personally wait for a greater margin of safety before initiating a position in Oracle.

The reason is that the execution doesn’t seem like a minor risk to me. Oracle is entering a much more capital-intensive phase, with a huge need for investment in data centers, GPUs, power, and networking. At the same time, the company already has a more leveraged balance sheet than other major technology players. This combination compels me to be more demanding regarding the entry price.

Therefore, although the thesis seems attractive to me, I wouldn’t consider it a buy at the current price. To feel more comfortable, I’d like to see a margin of safety closer to 25% relative to my estimated intrinsic value. In that scenario, I might consider including Oracle in my portfolio, although probably with a relatively small position , at least until I have more evidence that the capex starts to translate into sustainable free cash flow and attractive returns on invested capital.

Thank you so much for reading.

Alan

Analysis updated to June 2026

Disclaimer

The information contained in this document is for educational and informational purposes only. It does not constitute an offer, recommendation, or financial, investment, legal, or tax advice. The opinions expressed reflect personal analysis and may be subject to change without notice.

Investing in financial markets involves risks, including the potential loss of all invested capital. Each reader or investor is responsible for conducting their own research and, if necessary, consulting with a registered financial advisor before making any investment decisions.

The author assumes no responsibility for any losses or damages arising directly or indirectly from the use of the information presented here.

Introduction

If you’ve ever opened a PDF, spent hours editing a photo, or designed something on a computer, you’ve most likely crossed paths with Adobe. Whether you knew it or not, the red “A” logo has been part of the invisible infrastructure of the global digital economy for over four decades.

Almost everyone knows Adobe for Photoshop. But Photoshop is just one part of something much bigger. The company operates a complete ecosystem of creative tools (graphic design, video editing, animation, desktop publishing, photography) plus a document management platform (they invented PDF) and a marketing analytics suite for businesses. When you start looking at their full portfolio, you realize it’s not just “the Photoshop company”: it’s the operating system for creatives and marketers worldwide.

What makes Adobe a particularly interesting case study right now isn’t the business itself, which is extraordinary and well-established, but rather the tension between that historical quality and the challenge posed by generative artificial intelligence. The market has been punishing the stock severely for over a year, based on the theory that tools like Midjourney and DALL-E will erode the moat Adobe has built up over decades. And, as if that weren’t enough, as I write this, the CEO announced his departure from the company. Yet, the company continues to report 11% growth, 89% gross margins, and $10 billion in operating cash flow annually.

That contradiction between the fundamentals and the market price is exactly what makes it interesting to analyze at this moment.

Business model

Adobe operates in three major areas that, although distinct, feed off each other and share the same foundation: software as a subscription service in the cloud.

Until 2013, Adobe sold its products as perpetual licenses : you bought Photoshop CS6 for $700 and it was yours forever. It was Shantanu Narayen who made the then highly controversial decision to abandon that model and migrate everything to a monthly subscription scheme under the Creative Cloud brand . Users protested, and the stock price plummeted. Today, that decision has fundamentally changed the company.

Digital Media: The Heart

It is the largest segment, accounting for 74% of total revenue in FY2025 ($17.65B). It is further divided into two sub-segments:

Creative Cloud is a bundle of creative tools: Photoshop, Illustrator, InDesign, Premiere Pro, After Effects, Lightroom, and a dozen more. All integrated, all synced in the cloud, all for one monthly subscription. It’s what graphic designers, photographers, videographers, art directors, and marketing teams around the world use. Subscription revenue for this group was $16.3 billion in FY2025, growing 11% year-over-year.

Document Cloud is the world of PDFs and Acrobat. A quieter but equally powerful business: Adobe invented PDF in 1993, released it as an open standard (ISO 32000), but retains the premium tools for working with it. Signing documents, annotating contracts, converting files, combining PDFs: Acrobat Pro is the universal standard for all of that. And the segment is growing at 17% year-over-year, the fastest pace in the company. Acrobat AI Assistant, a chatbot that allows you to “talk” to PDF documents, is one of the AI ​​products with real traction in the portfolio.

Digital Experience: the enterprise segment

25% of revenue ($5.86B in FY2025). It’s the marketing platform for large enterprises, known as Experience Cloud . It includes analytics tools (Adobe Analytics), marketing automation (Marketo), web content management (AEM), and GenStudio, its AI platform for creating marketing content at scale. It competes directly with Salesforce Marketing Cloud and HubSpot in the enterprise segment. Subscription revenue here is growing at 11% year-over-year.

Publishing & Advertising: What’s Left

Less than 1% of revenue. Legacy products like FrameMaker and Captivate. Lacks strategic relevance. It’s in managed decline and will likely be removed from the portfolio at some point.

How he makes money

96 % of revenue is recurring : monthly or annual subscriptions. This makes the business highly predictable and resilient to short-term shocks. The metric Adobe uses to gauge the health of the business is Annual Recurring Revenue (ARR): the annualized value of all active subscription contracts. At the close of FY2025, total ARR was $25.20 billion, growing at 11.5% year-over-year.

Starting in FY2026, Adobe changed its reporting to present the business by customer type instead of by segment: Creative & Marketing Professionals (designers, agencies, photographers) and Business Professionals & Consumers (users of Acrobat, Adobe Express, and Firefly). This change makes strategic sense, as it aligns with how the company manages its business internally, but it creates a discontinuity in the historical data series. It’s worth noting.

Business quality

Sales

Adobe’s revenue growth over the past few years has shown remarkable consistency, especially considering the scale of the business. For a company generating over $23 billion annually, sustained growth of 10% to 12% is not something that can be achieved without a genuine moat.

What’s striking is the consistency : there are no dramatic post-pandemic peaks or valleys. There wasn’t the 2021 boom that other software companies experienced, nor the sharp decline that many suffered in 2022. Adobe simply continued growing at its usual pace. This speaks to the non-discretionary nature of part of its demand: creatives and businesses don’t cancel their Photoshop or Acrobat subscriptions when the market gets tough.

The fastest-growing segment is Business Professionals & Consumers (+15% in FY2025), which includes Acrobat, Adobe Express, and the new AI tools. That’s where the long-term growth strategy lies.

Regarding sales by region, Adobe operates globally with a mature presence in all developed markets. In FY2025, approximately 45% of revenue came from outside the United States, with Europe and Asia-Pacific being the most significant regions.

Vertical Analysis

Income Statement

When you look at Adobe’s Income Statement from a historical perspective (in this case, from 2016 to 2025), the first thing that strikes you isn’t any particular number. It’s the direction . Everything is moving in the same direction, year after year, like a well-calibrated machine.

Let’s start at the top: gross margin . In 2016 it was 86%. In 2025 it’s 89.27%. Nine years later, the company is more efficient at generating gross profit than before. For a company that went from selling software packages to operating its entire infrastructure in the cloud, that’s no small feat. This three-percentage-point increase in gross margin reflects the real economies of scale of the subscription model: each new user who enters the ecosystem costs proportionally less than the previous one.

But the number that interests me most is further down the list: the operating margin . In 2016 it was 25.5%. Today it’s 36.6%. That’s an eleven-point increase in nine years. And the trajectory wasn’t linear; there were a couple of years where it stagnated, particularly around 2022-2023 when the attempted acquisition of Figma and the associated costs weighed on the results. But the long-term trend is unequivocally upward.

There’s something worth breaking down here. If you add the cost of sales (~10.7%), plus SG&A expenses (~33.9%), plus R&D (~18.1%), plus amortization of intangibles (~0.7%), you arrive at 63.4% of revenue. The remaining 36.6% is the GAAP operating margin. Now, within those SG&A and R&D expenses, there’s a significant portion that’s Stock-Based Compensation: shares that Adobe gives its employees as part of their compensation. This cost exists and is real, even though Adobe (like almost all tech companies) excludes it in its non-GAAP presentation. In the Cash Flow statement, you’ll see that SBC hovers around 8% of revenue every year. It’s a number to keep in mind.

The net margin tells a similar story: it started at 20% in 2016 and closed FY2025 at 30%. Thirty cents of net profit for every dollar of revenue. To put that in context: the S&P 500 average is around 10-12%.

What this chart doesn’t tell you, and it’s important, is how much of that net profit is actual cash versus accounting figures. For that, you need the Cash Flow Statement. Spoiler alert: the story there is even better.

Balance Sheet

Looking at Adobe’s balance sheet from a historical perspective can initially seem counterintuitive. The superficial numbers don’t appear as pristine as those of other software companies of similar caliber. Equity as a percentage of total assets fell from 58% in 2016 to 39% in 2025. Long-term debt rose from 15% to 21%. At first glance, it might seem as though the balance sheet deteriorated. But when you understand what’s behind that shift, the story changes completely.

The explanation is simple: Adobe is aggressively buying back its own shares. The Treasury Stock line, which represents repurchased shares, has jumped from 40% of assets in 2016 to 166% in 2025. That’s not a mistake: Adobe has repurchased so many shares cumulatively that the value of those repurchases far exceeds the original capital invested by shareholders. Mathematically, that compresses equity as a percentage of total assets. But from the perspective of the investor who still owns shares, it’s good news: there are fewer shares in circulation competing for the same future returns.

Now, what really interests me about the assets is the composition of non-current assets. Goodwill represents 43.6% of total assets in 2025. Other intangibles make up another 1.7%. In total, almost 45% of Adobe’s balance sheet consists of intangible assets—basically the value paid above book value on historical acquisitions, plus brands, patents, and customer relationships. That’s not inherently bad: it reflects a business built on brands and software, not factories and machinery. But it does mean that a significant portion of the balance sheet is inherently difficult to value independently.

On the liabilities side, the most striking figure is the growth of Unearned Revenue Current: it rose from 15% to 23% of total assets between 2016 and 2025. Unearned revenue represents advance payments from customers that have not yet been recognized as income: in the annual subscription model, when someone pays $600 per year for Creative Cloud in January, Adobe recognizes that revenue at $50 per month. The growth of this line item is a positive sign: it means there are more customers paying upfront, more engaged with the ecosystem, and more guaranteed ARR.

In short: Adobe’s balance sheet reflects a company so confident in its ability to generate cash that it prefers to return capital to shareholders through share buybacks, even if it means compressing its equity, rather than accumulating unnecessary cash. This stance makes perfect sense when the ROIC is 48%.

Cash Flow Statement

If I had to choose just one financial statement to understand Adobe, I’d choose the Cash Flow Statement. Without a doubt. Because the Income Statement can be affected by accounting practices, the balance sheet can be distorted by repurchases, but cash flow is difficult to manipulate: either the money comes in or it doesn’t.

And in the case of Adobe, it comes in significant amounts.

Cash from Operations as a percentage of revenue started at 37.6% in 2016. By 2025, it had reached 42.2%. In absolute terms, that’s more than $10 billion in operating cash in a single year. For a business that generates $23.8 billion in revenue, converting more than 42% into operating cash is exceptional.

Free cash flow tells the same story: it rose from 34.1% of revenue in 2016 to 41.5% in 2025. Capital expenditures are practically negligible, historically hovering between 0.75% and 3.5% of revenue, and lately at the lower end. That’s the nature of pure software: once the code is written, the marginal cost of delivering it to a new user is almost zero.

One line item stands out in this chart: Stock-Based Compensation . It consistently represents between 6% and 8.5% of revenue every year in the series. In FY2025, it’s 8.17%. SBC is an adjustment that adds to net income to arrive at cash from operations because it’s an expense that didn’t involve an outflow of cash. But—and this is the important point—it does imply real dilution for the shareholder: Adobe is paying its employees with company stock, which means there are more shares in circulation competing for value. The fact that Adobe aggressively repurchases shares is partly to counteract that effect. If you look at Cash from Financing, you see that Share Repurchases consume between 25% and 49% of revenue every year. In FY2025, it was 49.5%. That’s huge.

Cash from Investing in FY2018 is the most dramatic in the series: -51.9% of revenue. That year saw the acquisition of Marketo for $4.75 billion. This is clearly reflected in the “Cash Acquisitions” line: -69.9% of revenue for that period. It’s one of the best examples of how a large M&A deal can consume an entire year’s cash flow but, if executed well, build value over time. Marketo is now the heart of the Experience Cloud segment.

At the opposite end of the spectrum is FY2024: Cash from Investing at a mere +0.69% of revenue. This was the year Adobe made no significant acquisitions, primarily because the regulatory process surrounding the Figma deal stalled until it fell through in December 2023. All the cash not allocated to acquisitions that year was used for repurchases.

The conclusion from the Cash Flow analysis is simple: Adobe is a free cash generating machine . It doesn’t need debt to grow, it doesn’t need dilutive equity to fund operations, and it generates enough cash to return capital to shareholders and continue investing in growth simultaneously. That’s not something that happens overnight; it’s the result of decades of building a business model with real structural advantages.

Ratios

Ratios are where financial analysis moves from describing what happened to understanding why it happened. And in Adobe’s case, there are several interesting stories.

Liquidity Ratios

Adobe’s Current Ratio reached 1.0x in FY2025, the lowest point in the historical series that began in 2016 when it was 2.08x. At first glance, this seems like a warning sign. But it needs to be understood in context: the subscription model generates Unearned Revenue (deferred revenue) that appears as a current liability because, technically, the company “must” deliver the service for which it has already been paid, but in practice, this will never involve an actual cash outflow. If you adjust the Current Ratio by excluding this component, the actual liquidity is more ample than the raw ratio suggests.

The Quick Ratio tells the same story: 0.88x in 2025 versus 1.99x in 2016. Adjusted to exclude unearned revenue from the denominator, the position is comfortable. And with $10 billion in annual operating cash, Adobe can cover its current liabilities several times over with the cash it generates in a quarter.

Solvency Ratios

The debt-to-equity ratio increased from 25.5% in 2016 to 57.3% in 2025. Long-term debt also grew in absolute terms. But here we must remember what we saw in the balance sheet: accounting equity was compressed by massive share buybacks. The debt-to-EBITDA ratio (which is the metric that really matters for assessing whether debt is manageable) remains at 0.72x in FY2025. That’s low. For reference: a debt-to-EBITDA ratio below 2x is generally considered conservative in the tech sector. Adobe has virtually no real operating leverage.

The 33x interest coverage in FY2025 confirms the same: the company generates 33 times the value of its financial expenses in operating income. There is absolutely no risk of debt stress here.

Profitability Ratios

Here are the numbers that matter most to me when evaluating whether a business is genuinely good or just big.

Adobe ‘s ROE ( Return on Equity) reached 61% in FY2025. Its ROIC (Return on Invested Capital) is 48%. To put that into perspective: an ROIC of 15-20% is already considered good in almost any industry. Adobe is generating a 48% return on the capital invested in the business. That’s what builds compound value over time, and it’s the reason why, despite all the debate about AI, the underlying business remains remarkably strong.

Return on Assets (ROA ) reached 24% in FY2025, the highest in the company’s history. In 2016, it was 9%. This 15-point jump over nine years reflects both the margin expansion seen in the Income Statement and the improved asset utilization efficiency: Adobe generates more revenue per dollar of assets today than at any point in its recent history.

Operating ROA (which uses operating income instead of net income, eliminating tax and financial effects) reached 30% in FY2025. In 2016 it was 12%. This indicator is a cleaner way to assess the purely operational profitability of the business, and it also shows the same upward trend.

The conclusion drawn from the ratios is the same as that of the rest of the financial analysis: Adobe is a business that consistently improves its profitability, efficiency, and cash flow year after year. The liquidity and solvency ratios show some figures that at first glance appear tight, but in context are entirely manageable for a company with this level of cash flow generation. The investment question isn’t whether the business was good; the ratios answer that unequivocally. The question is whether it will continue to be so good in an environment where AI is reshaping the industry.

Management team

On March 12, 2026, literally as I write this analysis, Adobe announced that Shantanu Narayen will step down as CEO once a successor is appointed. Narayen remains Chairman of the Board. This is the biggest news for the company in years.

Narayen’s legacy

Objectively, Narayen’s track record is extraordinary. He took over the company in 2007 with a market cap of approximately $15 billion and led it to a peak of $250 billion in 2024. The most significant decision of his tenure was the aforementioned pivot to the subscription model in 2013: controversial at the time, brilliant in retrospect. He also built the Experience Cloud segment from the ground up, transforming Adobe into a top-tier enterprise player in addition to its long-standing position in Creative.

Under his leadership, the stock rose more than sixfold, while the S&P 500 rose approximately 3.5 times over the same period. That’s no small number.

The timing problem

The problem isn’t that they’re leaving. The problem is the timing. The transition is happening at a time of great strategic uncertainty for the company: the market is debating whether Adobe can navigate the AI ​​transition.

The change in CEO raises questions about strategic continuity , capital allocation priorities, and the pace of innovation. It adds another layer of uncertainty to an already challenging environment.

The search includes both internal and external candidates. David Wadhwani (Digital Media) and Anil Chakravarthy (Experience Cloud) are the most frequently mentioned internally. An external CEO would be more disruptive but could bring a fresh perspective. The market will be watching closely to see who is appointed and what narrative they bring.

Capital Allocation

Adobe’s capital allocation policy has a clear logic: invest in R&D and grow the business organically, and return excess cash to shareholders through share buybacks. They do not pay dividends.

Capex

Capital expenditure is minimally low for a company of this size: just $190 million in FY2025, less than 1% of revenue. This is the nature of pure software: once the product is developed, the cost of replicating it is almost zero.

R&D

Adobe invests heavily in R&D, with expenses ranging from $3.5-4 billion annually (included in operating expenses, not capital expenditures). This is where the investment in Firefly, GenStudio, and the integration of AI across the entire suite comes from.

Share buybacks

The primary mechanism for returning capital. In FY2025, Adobe repurchased approximately 30.8 million shares . In Q4 FY2025 alone, it repurchased 7.2 million. At its scale, this equates to returning billions of dollars to shareholders by reducing the number of outstanding shares (which increases the value per share of the remaining shares). As mentioned earlier, the float decreased by 5.6% over the past year.

M&A

Adobe’s attempted acquisition of Figma for $20 billion was blocked by the European Commission in December 2023, which deemed it anticompetitive. Adobe was required to pay Figma a $1 billion penalty. More recently, Adobe completed its acquisition of Semrush Holdings (an SEO and digital marketing platform) for $1.9 billion in April 2026, integrating brand visibility and AI-powered search engine optimization tools into its Experience Cloud business.

As if this weren’t enough, CFO Daniel Durn has just announced that he will be stepping down in the latest results presented .

Industry and competitive advantages

The market in which it operates

Adobe competes in what can be called the creative software and digital experience market. There isn’t a single category that encompasses everything: the company is simultaneously in the market for design tools, document management, and marketing technology (known in the industry as martech).

The structural market demand is genuine. The digital content economy—the need to produce images, videos, graphics, documents, and experiences for a growing number of digital platforms—continues to expand. There are more graphic designers, content creators, digital marketing teams, and document professionals today than at any other time in history. This structural tailwind directly benefits Adobe.

Which makes it difficult to compete against them

Adobe’s moat is a combination of mutually reinforcing factors. It’s not a single barrier: it’s a set.

The most important factor is switching costs . The cost of migrating from Adobe Creative Cloud to another suite isn’t just about saving $50 per month. It’s about relearning workflows that took years to master, reopening files in proprietary formats (.PSD, .AI, .INDD) that don’t open well in other applications, losing the plugins and paid resources you built on the Adobe ecosystem, and convincing your clients to change the formats they require. A design agency that built its processes over ten years using Photoshop and Illustrator isn’t going to migrate for a 20% price difference. That switching cost is a real, yet invisible, asset.

The second is the industry standard effect . Photoshop is a verb in popular language, and “photoshopped” is a word that exists in colloquial Spanish. PDF is the global standard for shareable documents, and Adobe invented it and maintains the premium tools. When you’re the standard, you have market power that goes beyond the product’s features.

The third is the depth of the ecosystem . No competitor has the breadth of the Adobe suite. Everything is integrated: Photoshop shares libraries with Illustrator, which exports directly to InDesign, which syncs with Premiere Pro. Creating that network of integrations took decades and billions of dollars in R&D. It can’t be replicated in two years.

The AI ​​factor: driver or disruptor?

Herein lies the central question of the thesis. Generative artificial intelligence is the first real structural threat Adobe has faced in decades, and also its greatest opportunity.

The threat: Tools like Midjourney, DALL-E, and generative video models allow you to create professional-quality visual content with text prompts, without needing to master Photoshop. If a marketer can generate an image in 30 seconds with AI, the argument about switching to Creative Cloud at a lower cost erodes for certain use cases. The democratization of design that AI is enabling is real, and Canva and Figma are taking advantage of it.

The opportunity: Adobe has the world’s richest training dataset of professional creative content, direct distribution to millions of professionals, and the ability to integrate AI into the workflows where users already work. Firefly, its generative AI model trained on licensed content (making it commercially safe, unlike Midjourney or Stable Diffusion), is integrated into Photoshop, Illustrator, Premiere, and Express. Adobe’s AI-influenced ARR exceeded $5 billion in FY2025, and its AI-first ARR tripled year-over-year in Q1 FY2026. AI monetization is happening, but the market hasn’t yet given it the full recognition.

Competitive positioning

Adobe’s competitive landscape is unusual because it doesn’t have a single competitor that competes across the board. It has several challengers in specific segments, each with a different strategy.

Canva

The most remarkable growth story in the industry. With over 230 million monthly active users and an estimated ARR of nearly $3.1 billion, Canva democratized design for non-designers with a brilliantly executed freemium model. It’s the most direct competitor in the casual user and small business segment. The value proposition is simple: make visual design accessible to everyone, with no learning curve. It doesn’t replace Photoshop for the professional, but it captures the market that Adobe never quite managed to serve well: the marketer without a design background who needs an Instagram banner.

The risk Canva poses to Adobe is real but limited. It won’t displace Adobe in the professional designer and agency segment. But it can erode the periphery (and that periphery is valuable).

Figma

The competitor that should perhaps worry Adobe the most, and the one with the most dramatic storyline. Adobe tried to buy Figma for $20 billion in 2022 (the largest acquisition in the history of design software). European regulators blocked it in December 2023. Adobe had to pay a $1 billion termination fee.

Figma is the de facto standard for UI/UX design, with an estimated 80-90% market share. But what happened in 2025 makes it even more relevant: Figma launched Sites, Make, Buzz, and Draw, products that put it in direct competition with Illustrator, WordPress, and Canva simultaneously. It transformed from a competitor in the interface niche to one in the entire ecosystem. It’s working on its IPO for 2026, which will give it access to fresh capital to accelerate that expansion.

Microsoft / OpenAI

The most indirect competitor, but potentially the most dangerous on the 5-10 year horizon. DALL-E’s image generation capabilities via ChatGPT, its Office tools with integrated Copilot, and Microsoft Designer target the corporate and casual user segment. Adobe has integrated its apps with ChatGPT, and Acrobat and Photoshop are already available as platform extensions, but the long-term dynamics of how much of the enterprise creative market Microsoft can capture remains an open question.

Midjourney, Sora, and pure AI models

They’re not design suites, but they are the most discussed vector of disruption. Midjourney for images, Sora for video, Stable Diffusion as an open-source infrastructure. All of them allow the creation of visual content with text prompts. Adobe’s most vulnerable point of attack is the mid-level designer who currently uses Photoshop for tasks that AI can perform faster. How much of that usage can be replaced without eroding the professional core is the question the market still can’t answer.

Risks

A thesis that doesn’t seriously consider the risks is useless. Adobe’s risks are real and deserve unfiltered analysis.

Disruption by generative AI

This is the central risk, and the one the market is heavily pricing in. The question isn’t whether AI will change the design and content creation industry—that’s already happening. The question is whether Adobe will be on the right side of that change or the wrong side. Pure AI models (Midjourney, DALL-E, Sora) allow for the creation of professional-quality visual content without Photoshop. If this significantly erodes demand for Creative Cloud, Adobe’s core business is in trouble.

The key point: as of the date of this analysis, this scenario is not yet reflected in the operating figures. The ARR continues to grow at 11-12%, and margins remain stable. But the market, quite rightly, is not waiting for things to deteriorate before discounting the risk.

Figma, the open flank

The failed acquisition of Figma left Adobe without a foothold in interface design and, to make matters worse, gifted $1 billion to a competitor that is now expanding aggressively. Figma holds the market standard for UI/UX and is on its way to becoming a complete suite. Adobe has no clear response to this move, beyond betting that the professional market still needs Photoshop and Illustrator for highly complex work.

Pricing power under pressure

Adobe has a recent history of abrupt price hikes that have generated user backlash. The so-called ‘Price Rebellion’ of 2025, following a 40% increase in the Photography plan, prompted migrations to Affinity and Canva. In March 2026, Adobe agreed to pay $75 million to the U.S. Department of Justice for subscription cancellation practices deemed deceptive to consumers, plus an additional $75 million in free services for affected customers. This isn’t an amount that puts the business at risk, but it’s a reputational and regulatory signal worth monitoring.

CEO and CFO Transition

Already covered in the management section, but worth repeating as an explicit risk: uncertainty about strategic direction during the search and onboarding period for the new CEO is a real pressure factor on sentiment and potentially on execution.

Growth slowdown

The guidance for FY2026 points to revenue growth of 9-10% and ARR of 10.2%, stable but not accelerating. For the market to revalue the stock upwards, it needs to see acceleration, not stability. Until that happens, a multiple rerating is unlikely.

SWOT

Strengths

Adobe’s most difficult strength to replicate isn’t any specific product: it’s the depth of the ecosystem it built over four decades. Photoshop, Illustrator, InDesign, Premiere Pro, After Effects: all integrated, all synchronized, all speaking the same file language. When a designer has been working in that environment for ten years, the cost of leaving isn’t just learning another tool. It’s redoing workflows, converting files, re-educating clients. That invisible switching cost is the business’s most valuable asset.

Added to this is the subscription model that Narayen has been building since 2013. 96% of revenue is recurring. ARR closes FY2025 at $25.2 billion. That’s not just a financial figure; it’s structural predictability. Adobe knows how much it will bill next year. Very few businesses of that size can say the same.

The margins speak for themselves: 89% gross, 42% free cash flow on revenue. With a 48% ROIC and $10 billion in annual operating cash flow, Adobe has the resources to invest in R&D, make acquisitions, and return capital to shareholders simultaneously, without needing debt for any of the three.

And then there’s the PDF. Adobe invented the de facto standard for digital documents, released it as an open standard, and kept the premium tools for working with it. Acrobat Pro is the universal standard in millions of organizations. This silent monopoly on digital documents is behind the 17% year-over-year growth of Document Cloud, the least glamorous but increasingly strategic segment of the portfolio.

Opportunities

The most immediate opportunity is monetizing generative AI. Adobe has something no pure AI competitor has: direct distribution to millions of professionals already working within its tools. Firefly isn’t a separate product you have to search for; it’s integrated into the Photoshop that designers already have open. If they can leverage that integration into pricing power, growth can accelerate without needing new customers.

The Business Professionals & Consumers segment grew by 15% in FY2025, the fastest growth rate in the business. This is where Acrobat, Adobe Express, and new AI tools for non-creative users (marketers, lawyers, accountants who work with PDFs all day) reside. It’s a mass market that Adobe has historically struggled to serve effectively, and where competition is weaker than in the professional segment.

Emerging markets are another key driver. Today, the business is concentrated in North America (45%) and EMEA (37%). Asia-Pacific and Latin America have low penetration rates and structurally favorable growth rates for their digital middle class. As more creatives and professionals in these regions formalize their digital work, the demand for leading tools (i.e., Adobe’s) grows organically.

GenStudio and the enterprise marketing segment also have a track record. Large companies need to produce customized content at scale for dozens of markets and channels simultaneously. That’s exactly what GenStudio is designed for. If Adobe succeeds in positioning itself as the enterprise content production infrastructure, the TAM of the Experience Cloud segment will be considerably larger than current figures suggest.

Weaknesses

The most obvious is the open flank in interface design. Adobe tried to buy Figma for $20 billion, European regulators blocked the deal, it paid a $1 billion termination fee, and it lost its foothold in the UI/UX market, the fastest-growing segment of digital design. Adobe XD, its own answer, was discontinued. Today, Figma holds 80-90% of the digital product design market and is aggressively expanding into vector design, marketing content creation, and web development. Adobe has no clear response to that move.

Adobe’s recent history of aggressive pricing has also left its mark. The 40% price increase for the Photography plan sparked the exodus known as the “Price Rebellion” to Affinity and Canva. The $75 million settlement with the DOJ for deceptive cancellation practices reinforces the narrative that Adobe, at times, prioritizes extracting value over the user experience. In a market where competitors offer increasingly competitive alternatives, this reputational damage is not a luxury Adobe can afford.

And now, on top of all that, the CEO transition comes at the worst possible time for market sentiment. Narayen was the architect of the company’s most significant transformation. His departure, however orderly, creates a leadership uncertainty that the market will take time to process.

Threats

Generative AI is the central threat and is already discussed in detail in the analysis. But it’s worth summarizing here: if image and video generation models become good enough to cover the use cases of mid-range designers without needing Photoshop, Adobe loses its main switching cost argument. This hasn’t happened yet, as the operational figures don’t show it, but the market has been pricing it in for over a year.

Figma post-IPO is the second concrete threat. When it goes public, likely in 2026, it will have access to fresh capital and public visibility that will accelerate its expansion. The combination of Figma (interface design and collaboration), Canva (simple design for non-designers), and the native AI tools from OpenAI and Microsoft covers an increasingly broad spectrum of what Adobe currently requires for users who are not high-end design professionals.

Regulatory pressure is a threat that is often underestimated. The blocking of the Figma acquisition set a clear precedent: any large Adobe deal in the creative software segment will be under antitrust scrutiny. This limits M&A as a growth driver in precisely the markets where it is most needed.

Porter’s 5 Forces

1. Bargaining power of suppliers = LOW

Adobe’s most important suppliers are cloud infrastructure providers (primarily AWS and Azure) and the talented developers who build and maintain the software. In both cases, Adobe’s bargaining power is high relative to the supplier.

In cloud infrastructure, Adobe has sufficient scale to negotiate favorable contracts, and the multi-cloud nature of its architecture gives it the flexibility to avoid dependence on a single provider. It’s not a company that can be held hostage by AWS in the same way a startup might be.

In terms of talent, the software engineering market is competitive and salaries are high, which does create cost pressures. The generous SBC (salary-to-income ratio) that we criticize as dilutive for shareholders serves a real purpose here: it’s the mechanism that allows the company to retain senior engineers who would otherwise go to Google or a startup with stock options.

In summary: suppliers do not have significant power over Adobe. This is favorable for the company in my opinion.

2. Buyer bargaining power = MEDIUM

The answer here depends a lot on the customer segment you’re looking at.

For individual clients (freelancers, photographers, designers), bargaining power is low. Adobe sets the price; the client either accepts it or leaves. And as we saw with the switching costs analysis, “leaving” has a real cost that most professionals are unwilling to pay. This gives Adobe considerable pricing power over this segment, as demonstrated by the price increases of recent years.

For enterprise customers (multinationals that negotiate Creative Cloud or Experience Cloud licenses for thousands of employees), the negotiating power is greater. These customers have a real ability to threaten partial migrations to competitors. Adobe has to work harder to retain and expand those contracts.

The growth of the Business Professionals & Consumers segment (Acrobat and Express users who may be less reliant on the entire creative ecosystem) introduces buyers with more options and lower switching costs. This can gradually increase bargaining power in that segment as Canva and AI tools become more competitive.

In summary: medium pressure, differentiated by segment. Favorable in the professional core, neutral to unfavorable at the edges.

3. Threat of new entrants = LOW to MEDIUM

Competing against Adobe at its core—the complete suite of creative tools for professionals—is virtually impossible for a new entrant. The barriers are formidable: decades of product development, an ecosystem of plugins and integrations built by third parties, proprietary file formats adopted as industry standards, a culturally ingrained brand, and a base of millions of users who have learned to work with those tools. No venture capital firm in the world is going to fund “the next Photoshop” because the odds of replicating that ecosystem are minimal.

The threat from new entrants is most real at the edges of the business: pure AI tools. Midjourney was founded in 2021 and in three years has a product that generates photorealistic images from text. OpenAI’s Sora is from 2024. Runway ML is from 2018. These are all new entrants that aren’t trying to be Adobe, but rather targeting specific use cases that previously required hours in Photoshop or Premiere and can now be done in minutes with a prompt. That’s disruptive, even if it’s not a direct approach.

The conclusion is that the threat of total replacement is low, but the threat of partial substitution, i.e., erosion of specific use cases, is medium and increasing.

4. Threat of substitute products = HIGH

This is the most active force in Adobe’s analysis right now, and the one that worries the market the most.

Adobe’s alternatives aren’t simply cheaper versions of the same thing; they’re distinct categories that address the same fundamental need: creating high-quality visual content. Adobe solves this with powerful, professional tools that have a steep learning curve. The alternatives are addressing it with generative AI, simplified interfaces, and freemium models.

Canva is the most established substitute for anything that doesn’t require complex professional work: the marketer who needs a banner, the entrepreneur who designs their logo, the small business that manages its social media. It doesn’t replace Photoshop for a professional retoucher. But it does replace Creative Cloud for 80% of the use cases of 80% of users who aren’t professional designers.

Midjourney and DALL-E are replacing Photoshop for generating images from text. Sora and Runway are partially replacing Premiere Pro for video. Figma has already completely replaced Adobe XD in interface design. And large language models can replace parts of Acrobat for summarizing and analyzing documents.

The paradox for Adobe is that it’s responding to this threat with its own arsenal of AI: Firefly, Acrobat AI Assistant, GenStudio. And it has real advantages to compete. But the rate at which new, targeted alternatives are emerging is high, and not all of them can be locked in with integration within its own ecosystem.

This force is the most unfavorable for Adobe at this historical moment.

5. Rivalry among existing competitors = MEDIUM to HIGH

For decades, Adobe operated in a market where rivalry was manageable. Corel, Quark, Macromedia—all were either absorbed or became marginal. Its dominant position was so solid that real competition was almost anecdotal.

That changed. Today, Adobe faces competition on multiple fronts simultaneously, something unprecedented in its recent history.

Figma has been winning the UI/UX market for years and is now expanding. Canva has grown from a simple design tool into a suite that competes with Express, Illustrator, and potentially more. Salesforce Marketing Cloud and HubSpot compete in the Experience Cloud segment. Microsoft, with Copilot integrated into Office and with Designer, is venturing into the same territory in the enterprise market. And the aforementioned pure AI tools compete for usage time and, eventually, budget.

What mitigates this rivalry is that none of these competitors competes across the entire Adobe spectrum simultaneously. This fragmentation of the competitive landscape is an advantage for Adobe: no single substitute covers everything that Creative Cloud, Document Cloud, and Experience Cloud offer combined. The risk is that users will choose a combination of specialized tools instead of the integrated ecosystem.

Rivalry isn’t existential today. But it’s more intense than it has been at any point in the last twenty years, and the trend is toward more competition, not less.

Bulls vs. Bears

Few S&P 500 stocks are generating as much debate right now as Adobe. Each side’s argument is internally consistent, making the investment decision genuinely difficult.

What are the bulls saying?

Those who defend the stock always start with the same argument: the operating numbers don’t show the disruption the market is pricing in. Revenue grew by 12% in the last quarter, ARR by 11.5%, and non-GAAP operating margins by 46-47%. If there were a real erosion of demand, it would be reflected in the contract renewal and expansion numbers, and so far, it isn’t.

The second bullish argument is valuation. Adobe is trading at approximately 15x GAAP earnings and 10x forward earnings. For a business growing at 11-12% with an 89% gross margin and $10 billion in annual free cash flow, those multiples are anomalously low. Adobe’s historical average was 37-38x earnings over a decade. Even applying a substantial discount for AI uncertainty, the gap with historical value appears excessive.

Third: AI monetization is happening. AI-first ARR tripled year-over-year in Q1 FY2026. Acrobat AI Assistant has real commercial traction. GenStudio is starting to close enterprise deals. Bulls argue that the market is pricing in an erosion scenario that hasn’t materialized and that there is emerging evidence that it may not.

What do the bass players say?

Bears start with the risk structure: AI is detrimental to Adobe. No matter how good Firefly is, the hourly rate for a designer using AI decreases, which should erode willingness to pay for expensive licenses. Canva and Figma offer cheaper alternatives with native AI. Price pressure is inevitable.

Second bearish argument: growth isn’t accelerating. For a business that needs a multiple re-rating , stabilizing at 10-11% isn’t enough. Guidance for FY2026 suggests 9-10% revenue growth. No acceleration, no rerating.

Third: the market no longer trusts management. The failed Figma deal, the price increases that triggered backlash , the settlement with the DOJ, and now the CEO’s departure… these are all signs that management is not in control of the narrative. And the uncertainty surrounding who will be the next CEO doesn’t help.

Fourth: Figma post-IPO will be a competitor with fresh capital and public visibility. When it goes public in 2026 (if it does), it will intensify the pressure on Creative Cloud in the product design and collaborative tools segment.

Valuation

Before getting into the model’s numbers, it’s worth clarifying something that I believe is a common mistake.

When a stock falls sharply, it’s common to hear that “it’s cheap because it’s trading at its lowest multiple ever” or that “it’s an opportunity” because the company has been performing well and next year is going to be good (which is more or less the case with Adobe). The problem with that reasoning is that a short-term multiple, or even a good year ahead, doesn’t capture where most of a business’s value lies.

In a DCF analysis like the one I put together, approximately 70% of the total valuation comes from the terminal value, that is, what the company is assumed to generate after the explicitly projected period (in this case, after 2030). The remaining 30% comes from the cash flows of the first five years.

In other words, if Adobe is going to be impacted by generative AI, it doesn’t matter so much if next year is good. What matters is what happens in 2030, 2035, and 2040. And that’s exactly what the model attempts to capture with the three scenarios: different visions of what Adobe looks like in the long term, not in the next quarter.

That’s why the Best Case isn’t “Adobe grows strong over the next two years.” It’s simply “Adobe doesn’t deteriorate.” And only then does the upside become attractive.

Model Inputs and Assumptions

The assumptions behind the number

A valuation model is simply a way of making explicit the assumptions one already has in mind. Before looking at the final result, it’s helpful to understand where it all comes from.

The model I developed is a DCF with two valuation methods: constant growth perpetuity and exit multiple on EBITDA. The explicit projections cover five years (FY2026 to FY2030), and the main inputs are three: revenue growth, margins, and cost of capital (9.12%). Each has three versions (Best Case, Base Case, and Worst Case) that reflect three different views on how Adobe will perform in the context of the transition to generative AI.

The three scenarios and their logic

The scenario structure follows a different logic than usual. Or at least it’s one of the few models I’ve created where the best case scenario is similar to the company’s historical performance: the best case is the status quo scenario . Adobe is not materially affected by generative AI, growth starts at 10% and naturally slows to a terminal 6.5%, gross margins remain stable at 89%, and the operating margin stays around 36%. This is the scenario that current numbers don’t yet contradict and the one defended by those who argue that the AI ​​threat is exaggerated.

The base case incorporates gradual but not catastrophic deterioration . Growth starts at 9.6% in FY2026 and reaches a terminal 4.5%, slower than it would organically grow. Gross margin compresses from 89% to a terminal 87.4%, reflecting higher AI infrastructure costs and some pricing pressure in the mid-segments. Operating margin falls from 36.6% to a terminal 32%, implying that Adobe needs to spend more on SG&A and R&D to defend its position. It’s not a collapse, but it’s a company that has lost some of its structural advantage.

The worst-case scenario is the same story, but faster and more profound . Growth reaches a terminal 3%, gross margin falls to 80%, and operating margin to 27%. It’s not a catastrophe in absolute terms (Adobe continues to generate billions of dollars in free cash flow), but it implies an erosion of the moat that translates into a significantly lower exit multiple.

This structure reflects my personal position: the threat of AI makes me uneasy. I don’t believe Photoshop will disappear, but I also don’t believe the business will continue as it has for the last decade, as if nothing has changed. The Base Case and the Worst Case are my way of expressing that skepticism in concrete numbers.

How much does Adobe cost? The two methods and what they say

I used two methods to calculate the terminal value: constant growth perpetuity and exit multiple over EBITDA. Each tells a different story, and the difference between the two is, in itself, informative.

Method 1: Perpetuity

Discounting the projected cash flows at a WACC of 9.12% with a terminal growth rate of 2.5% , the values ​​per share are as follows:

In the base scenario , the price per share is $296 .

In the best scenario , the price per share is $356 .

In the worst-case scenario , the price per share is $241 .

Method 2: Terminal EBITDA Multiple

Here the model uses a different multiple for each scenario.

The best case uses 12x. If Adobe is not impacted by AI, it remains a very high-quality SaaS business with moderate growth and 89% margins, and a 12x multiple is reasonable for that profile.

The Base Case uses 8x. What that scenario says is that I assume the market will value Adobe the same in 2030 as it does today, without any re-rating. It’s the no-improvement sentiment scenario.

The Worst Case uses 6x. If the deterioration is more severe and the market discounts further deterioration of the moat, a multiple below the current level makes sense.

The results:

In the base scenario , the price per share is $230 .

In the best scenario , the price per share is $359 .

In the worst-case scenario , the price per share is $161 .

Reading both methods together

The divergence between the two methods in the Base Case ($296 for perpetuity vs. $230 for multiple) remains the investment question summarized in two numbers: the perpetuity method says that if long-term cash flows materialize, the stock has a good upside; the multiple method says that without re-rating the current multiple, the upside is lower.

The conclusion I draw from all this is that Adobe is (or was) a very high-quality business trading at a price that reflects real risk. I don’t think it’s a steal, though. The situation is one where the resolution of the AI ​​debate is the determining factor, and that debate remains unresolved. Anyone buying at these prices is assuming the market is being overly pessimistic. Perhaps. But the margin for error is smaller than it first appears.

The greatest upside potential lies in the best-case scenario, which, as I mentioned earlier, would be the status quo. Adobe is unaffected by AI, and everything remains virtually unchanged. In this scenario, both methods offer an upside potential of over 70%.

A note on share buybacks: Adobe has an aggressive buyback program (repurchasing nearly 6% of its float in FY2025), and it’s reasonable to assume it will continue given the volume of free cash it generates. I didn’t incorporate it into the model because predicting the pace and price of future buybacks involves a level of assumption I prefer not to make. What is worth clarifying is that this makes the analysis conservative in that respect: if buybacks continue at a similar pace to historical levels, the share price in all scenarios would be higher than the figures presented here, without needing to change any operational assumptions.

Conclusions

I held Adobe in my portfolio for a while, years before all this happened. I bought in when the market hadn’t yet given it the full credit it deserved and sold when I felt it was overvalued. Luckily, the return was good. At the time, the decision to sell wasn’t easy because the business was still excellent, but it was trading at a demanding valuation.

Today the situation is different. The stock has fallen more than 60% from its highs, and the multiples that once seemed demanding now appear cheap, depending on your perspective. The problem is that this perspective matters much more than in other situations, because Adobe’s future depends not only on its ability to execute but also on something no one knows how it will turn out: the impact of artificial intelligence on its business.

My base case scenario isn’t that of a bank analyst projecting the consensus. It’s that of someone who believes Adobe will be affected, to some extent, by what’s happening with AI. Every week something new emerges that surprises us. Things that two years ago required hours of professional work can now be done in minutes with a prompt. Many entrepreneurs and small businesses will stop hiring certain profiles because they won’t need them in the same way anymore. That won’t kill Adobe, but it will hit them hard.

The Adobe ecosystem will remain relevant, likely more so in the institutional segment and for more complex projects. But the broader user base—those who used Creative Cloud for everyday tasks without being professional designers—is precisely the one most vulnerable to replacement. And that base is part of the growth the subscription model needs to continue expanding.

The best-case scenario for this model isn’t one where Adobe experiences rapid growth or improved margins. It’s simply one where deterioration doesn’t occur, where the business remains more or less as it is today. Only then does the upside become interesting. The fact that you need the scenario without deterioration to achieve an attractive return speaks volumes about the current entry point.

And on top of all that, the departures of Shantanu Narayen and CFO Daniel Durn . Narayen was one of my favorite CEOs. It’s significant that someone who took a company with a $15 billion market cap and led it to a peak of $250 billion has decided that this is the moment to step aside. There may be a thousand personal reasons behind it, and perhaps none have to do with the strategic vision of the business. But the reality is that both are leaving at a time of great uncertainty, in the midst of a technological transition that will define the company’s future, and without a successor yet designated. That’s a lot of uncertainty all at once.

There are too many open questions at once for me to feel comfortable taking a position. If someone is convinced that AI won’t affect Adobe, or if they already have a position and want to maintain or expand it, all I would say is to be careful with the weight they assign to it in their portfolio and to be patient. The uncertainty in this case isn’t the kind that resolves itself in a quarter. It’s structural and may take time to become clear.

Personally, I prefer to stay out and keep watching from a distance . The stock seems to be getting more attractive in terms of price, but the uncertainty is growing. I don’t think it makes sense to take this risk when there are companies with a much clearer outlook offering attractive returns.

Thanks for reading!

Greetings,

Alan