2 Reasons Adobe Stock Is Ready to Rally This Year

Key Points

• Adobe's stock price pullback presents an opportunity for investors, as the Q2 results and guidance for Q3 are robust.
• AI is gaining traction and driving profitable growth for this blue-chip tech company.
• Cash flow is a critical factor that allows for aggressive share buybacks. 

There are two reasons to consider buying Adobe NASDAQ: ADBE for second-half 2025 gains: this range-bound stock is rebounding from the low end of its narrowing trading range and is likely to break out of the range with this rebound. The reason the stock is expected to break out of its range is that it's gaining traction with AI, monetizing it, generating robust cash flow, and aggressively repurchasing shares.

The AI factor is critical, as it is the driver of technology and business markets today. It is expected to accelerate in growth over the next two years as AI infrastructure is leveraged to create AI models, inference, and services, such as those already provided by Adobe. 

Results underpin Adobe’s stock price rebound. The Q2 report highlights broad-based strength with revenue up 10.5% year-over-year, outpacing the consensus reported by MarketBeat, driven by gains in all revenue streams. Segmentally, Digital Media was strongest with an 11% increase and a 12% rise in annual recurring revenue (ARR).

However, Digital Experience also performed strongly, with a 10% gain, led by an 11% increase in subscriptions. Regarding end-markets, Business and Consumer revenue grew by 15%, trailed by a 10% increase in Creative Professional and Marketing. 

Adobe’s growth is profitable. Despite increased investment and marketing, the company widened its margin at both the gross and operating levels, driving leveraged gains in earnings and cash flow. The results include $2.67 billion in adjusted operating income, $2.17 billion in adjusted net income, and $2.19 billion in cash flow, resulting in a 37% cash flow margin.

Cash flow is a critical factor for this investment, as it enables reinvestment and aggressive capital returns while maintaining a healthy balance sheet. Capital return consists solely of share buybacks, which are aggressive, reducing the count by an average of 4.9% in fiscal Q2 2025. 

Adobe Raises Guidance and Will Raise Guidance Again in 2025

Adobe’s Q2 report includes a favorable outlook for the year, with Q3 and full-year targets raised, forecasting continued momentum. The outlook for Q3 places the midpoint of the range above the consensus reported by MarketBeat, while the full-year targets are above consensus at the low end. 

The takeaway is that guidance is likely to increase again at the end of Q3 and continue to lift market sentiment. The initial analysts’ response to the news appears mixed at face value, with several price target reductions offset by a greater number of price target increases and a narrowing range around the consensus. It forecasts a 20% upside in mid-June, placing the market at the high end of the trading range. 

The balance sheet raises some concerns regarding the cash balance, current assets, total assets, and equity. However, the declines posted in Q2 are offset by the aggressive share repurchases, overall balance sheet health, and cash flow outlook.

The company’s cash flow is expected to remain robust, rebuilding the balance by year’s end while sustaining its capital plans. The timing of debt payments and issuance is also a factor, significantly reducing cash in the quarter. Regarding debt and leverage, the company is in a strong position with total liabilities approximately 1.5x its equity. 

Adobe’s Stock Price Rebound Pulls Back to Test Support

Adobe’s stock price action following the release was mixed, with shares down 5% in premarket action despite the strong results. The pullback presents a buying opportunity that is unlikely to last long. The risk is that the market will pull back to even lower levels, possibly as low as $370, before confirming support.

Regardless, the market will likely produce a clear signal soon due to the institutional activity. They own over 80% of the stock and have been buying on balance this year.