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VALUATION SCENARIOS - DISCOUNTED CASH FLOW (DCF) ANALYSIS
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📊 LLM-DETERMINED DCF PARAMETERS FOR ADBE
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Adobe is a high-quality software compounder with 51.9% ROIC, 36% operating margins, and a dominant position in creative/document software. FCF per share has compounded at 16.6% over 14 years, but at $248 the stock trades at only 14.3x P/E and ~11.5x FCF — unusually cheap for this quality, suggesting the market is pricing in AI disruption risk to Adobe's core creative tools business. I use reported FCF of $8.84B as the base, which aligns with OCF minus CapEx and represents normalized cash generation.

Scenario Parameters (LLM-selected based on fundamental analysis):
  🔻 Bear: 4.0% growth, 10.5% WACC, 2.0% terminal
     → AI-native competitors (Canva, Midjourney, open-source tools) erode Adobe's creative suite pricing power. Revenue growth decelerates to mid-single digits as enterprise customers consolidate licenses and generative AI reduces per-seat demand. Margins hold but FCF growth stalls at GDP-like rates.
  ⚖️  Base: 9.0% growth, 9.5% WACC, 2.5% terminal
     → Adobe successfully integrates AI (Firefly) into its product suite, defending its creative monopoly while expanding into new consumption-based revenue streams. Revenue grows 10-12% near-term tapering to 7-8%, with stable-to-expanding margins driving high-single-digit FCF growth over the decade.
  🔺 Bull: 13.0% growth, 9.0% WACC, 2.5% terminal
     → Firefly and generative AI credits become a major new revenue stream, expanding TAM beyond traditional creative professionals into marketing, social media, and enterprise content creation. Adobe transitions from per-seat to consumption-based pricing that grows faster than headcount, with operating margins expanding toward 42-45%.

Base FCF: Reported FCF of $8.84B matches calculated FCF (OCF $10.03B minus ~$1.19B CapEx) and represents a clean, normalized figure. FCF per share from roic.ai ($23.13) on ~410.5M shares implies ~$9.5B, broadly consistent. The $8.84B is conservative and appropriate as the base.


Stock: ADBE
Current Price: $248.15
Shares Outstanding: 0.41B (410,500,000 shares)

Base Year FCF (FY 2025): $8.8B (from financial statements)

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BEAR CASE (Probability: 25%)
Conservative: Below-trend growth, elevated risk premium, modest recession impact

ASSUMPTIONS:
  • FCF Growth Rate (Years 1-10): 4.0%
  • Discount Rate (WACC): 10.5%
  • Terminal Growth Rate: 2.0%

10-YEAR FCF PROJECTION:
Year     FCF ($M)        PV Factor    PV of FCF ($M) 
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1        $9,197,760,000      0.9050 $8,323,764,706
2        $9,565,670,400      0.8190 $7,834,131,488
3        $9,948,297,216      0.7412 $7,373,300,224
4        $10,346,229,105      0.6707 $6,939,576,681
5        $10,760,078,269      0.6070 $6,531,366,288
6        $11,190,481,400      0.5493 $6,147,168,271
7        $11,638,100,656      0.4971 $5,785,570,138
8        $12,103,624,682      0.4499 $5,445,242,483
9        $12,587,769,669      0.4071 $5,124,934,101
10       $13,091,280,456      0.3684 $4,823,467,389
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Total PV of 10-Year FCF:            $64,328,521,770

TERMINAL VALUE:
  • Year 11 FCF: $13,353,106,065
  • Terminal Value: $157,095,365,470
  • PV of Terminal Value: $57,881,608,673

VALUATION SUMMARY:
  • Enterprise Value: $122.2B
  • Less: Total Debt: $6.2B
  • Plus: Cash & Equivalents: $1.2B
  • Equity Value: $117.2B
  • Shares Outstanding: 0.41B
  • Intrinsic Value per Share: $285.42
  • Current Price: $248.15
  • Upside/Downside: +15.0%
  • Margin of Safety: 13.1%
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BASE CASE (Probability: 50%)
Balanced: Sustainable growth trajectory, market-appropriate discount rate, realistic perpetuity assumptions

ASSUMPTIONS:
  • FCF Growth Rate (Years 1-10): 9.0%
  • Discount Rate (WACC): 9.5%
  • Terminal Growth Rate: 2.5%

10-YEAR FCF PROJECTION:
Year     FCF ($M)        PV Factor    PV of FCF ($M) 
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1        $9,639,960,000      0.9132 $8,803,616,438
2        $10,507,556,400      0.8340 $8,763,417,277
3        $11,453,236,476      0.7617 $8,723,401,673
4        $12,484,027,759      0.6956 $8,683,568,788
5        $13,607,590,257      0.6352 $8,643,917,789
6        $14,832,273,380      0.5801 $8,604,447,845
7        $16,167,177,985      0.5298 $8,565,158,129
8        $17,622,224,003      0.4838 $8,526,047,818
9        $19,208,224,163      0.4418 $8,487,116,092
10       $20,936,964,338      0.4035 $8,448,362,138
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Total PV of 10-Year FCF:            $86,249,053,986

TERMINAL VALUE:
  • Year 11 FCF: $21,460,388,447
  • Terminal Value: $306,576,977,808
  • PV of Terminal Value: $123,708,159,873

VALUATION SUMMARY:
  • Enterprise Value: $210.0B
  • Less: Total Debt: $6.2B
  • Plus: Cash & Equivalents: $1.2B
  • Equity Value: $204.9B
  • Shares Outstanding: 0.41B
  • Intrinsic Value per Share: $499.17
  • Current Price: $248.15
  • Upside/Downside: +101.2%
  • Margin of Safety: 50.3%
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BULL CASE (Probability: 25%)
Optimistic: Strong execution, market share gains, operating leverage, sustained competitive advantages

ASSUMPTIONS:
  • FCF Growth Rate (Years 1-10): 13.0%
  • Discount Rate (WACC): 9.0%
  • Terminal Growth Rate: 2.5%

10-YEAR FCF PROJECTION:
Year     FCF ($M)        PV Factor    PV of FCF ($M) 
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1        $9,993,720,000      0.9174 $9,168,550,459
2        $11,292,903,600      0.8417 $9,505,011,026
3        $12,760,981,068      0.7722 $9,853,818,770
4        $14,419,908,607      0.7084 $10,215,426,798
5        $16,294,496,726      0.6499 $10,590,304,846
6        $18,412,781,300      0.5963 $10,978,939,886
7        $20,806,442,869      0.5470 $11,381,836,763
8        $23,511,280,442      0.5019 $11,799,518,846
9        $26,567,746,900      0.4604 $12,232,528,712
10       $30,021,553,996      0.4224 $12,681,428,848
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Total PV of 10-Year FCF:            $108,407,364,954

TERMINAL VALUE:
  • Year 11 FCF: $30,772,092,846
  • Terminal Value: $473,416,813,021
  • PV of Terminal Value: $199,976,377,986

VALUATION SUMMARY:
  • Enterprise Value: $308.4B
  • Less: Total Debt: $6.2B
  • Plus: Cash & Equivalents: $1.2B
  • Equity Value: $303.3B
  • Shares Outstanding: 0.41B
  • Intrinsic Value per Share: $738.95
  • Current Price: $248.15
  • Upside/Downside: +197.8%
  • Margin of Safety: 66.4%
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SENSITIVITY ANALYSIS - Intrinsic Value per Share
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How intrinsic value changes with different growth and discount rates:

Growth →           3%          5%          8%         10%         12%         15%   
WACC ↓      ------------------------------------------------------------------
   8%    $   405↑  $   476↑  $   605↑  $   709↑  $   830↑  $  1049↑ 
   9%    $   340↑  $   398↑  $   502↑  $   587↑  $   684↑  $   861↑ 
  10%    $   293   $   341↑  $   428↑  $   498↑  $   578↑  $   724↑ 
  11%    $   257   $   297   $   371↑  $   430↑  $   498↑  $   621↑ 
  12%    $   228   $   263   $   327↑  $   377↑  $   436↑  $   540↑ 

Current Price: $248.15
Base FCF: $8.8B
Terminal Growth: 2.5% (constant)

Legend: ↑ = 30%+ upside  |  ↓ = 10%+ downside
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REVERSE DCF — WHAT IS THE MARKET PRICING IN?
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Using IDENTICAL assumptions as Base Case DCF:
  • WACC (Discount Rate): 9.5%
  • Terminal Growth Rate: 2.5%
  • Base FCF: $8.8B
  • Current Price: $248.15

  → Market-Implied FCF Growth Rate: -0.1%
  → Base Case uses: 9.0% growth → $499.17/share

  📊 Market is pricing in LOWER growth (-0.1%) than our Base Case (9.0%)
     → Potential upside if company achieves base case growth
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PROBABILITY-WEIGHTED VALUATION
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Bear Case (285.42) × 25%  = $71.36
Base Case (499.17) × 50%  = $249.59
Bull Case (738.95) × 25%  = $184.74

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Weighted Average Intrinsic Value: $505.68
Current Price: $248.15
Upside/Downside: +103.8%
Margin of Safety: 50.9%
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