Creative Infrastructure with Compounding Power
A Research-Driven Spotlight By Compounding Academy
We’ve studied Adobe for years, but the current AI shift makes it more relevant than ever. While many worry that generative tools like Canva or Midjourney will eat Adobe’s lunch, the data and the workflows tell a different story.
Adobe is not simply a design company. It’s infrastructure for how content gets created, managed, and delivered at scale. Its tools are deeply embedded in creative and marketing operations across industries.
And with 90%+ recurring revenue, elite margins, and capital-light scalability, it remains one of the strongest compounders in software.
Let’s break down the case.
Adobe’s business is built around three clouds: Creative, Experience, and Document.
Creative Cloud is what most know: Photoshop, Illustrator, Premiere Pro, After Effects. These tools are used every day by creative professionals in film, design, advertising, and digital content. They are the industry standard and have been for decades.
Experience Cloud is Adobe’s enterprise platform for customer data, analytics, and personalized marketing. It’s less visible but increasingly critical for businesses optimizing digital experiences across channels.
Document Cloud includes Acrobat and Sign, products that digitize and streamline document workflows. It’s smaller today but growing steadily with the shift to e-signature and remote work.
All three segments operate under a subscription model. That shift, made in 2013, now underpins the durability of Adobe’s business.
Adobe scores highly on every measure we care about.
Revenue is over 90% recurring, providing visibility and resilience. Gross margins sit at 88%, among the highest in our universe, and operating margins have climbed back to 36%+ after reinvestment in AI. ROIC exceeds 50%.
But it’s the depth of workflow integration that matters most. Adobe’s tools are not just purchased, they’re relied on. Teams build their creative and marketing processes around them. Entire careers are trained on them. This creates real switching costs, even as cheaper alternatives proliferate.
It also reinforces pricing power. Customers pay not just for features but for performance, compatibility, and reliability across teams and use cases. That’s why Adobe can raise prices with relatively low churn.
We’re living through a content explosion.
Over 4.5 billion people use social media. 82% of internet traffic is video. Businesses across industries, from retail to education, are ramping up content production. And now AI is accelerating this further, automating what used to take hours into minutes.
These trends are structural, not cyclical. The content creation tools market is growing at 14% annually through 2030. And Adobe sits at the center.
Importantly, this isn’t just about designers anymore. Marketers, educators, influencers, and small businesses all rely on Adobe. That broadens its relevance and lowers its vulnerability to any one end-market.
Adobe’s durability stems from a combination of structural advantages and product-level execution.
Its tools are the global standard across creative industries. Photoshop, Illustrator, and Premiere are taught in schools, required by employers, and used daily by professionals. Once someone is trained on Adobe, they tend to stay on Adobe. This default status compounds through user familiarity and institutional inertia.
The products are embedded into daily workflows. They sit at the center of content creation, review, approval, and publishing. That makes them hard to displace, especially in environments where multiple stakeholders or departments rely on the same platform.
Adobe also benefits from cross-suite synergies. Creative Cloud, Document Cloud, and Experience Cloud are increasingly integrated. The more tools a customer uses, the higher the switching costs and the broader the share of wallet. This architecture strengthens retention while expanding monetization.
Its brand is another advantage. Adobe is positioned as a premium provider with pricing power to match. Customers pay for software that is secure, reliable, and continually improving. Price increases tend to stick because Adobe’s tools are considered essential.
Finally, the subscription model remains a key engine. Since transitioning in 2013, Adobe has consistently grown recurring revenue with low churn and high margins. That revenue base compounds through expansion rather than reinvention, enabling consistent reinvestment and long-term planning.
Adobe isn’t standing still, through the AI revolution. Firefly, its generative AI engine, adds features like image generation and text fill to core products. But the real edge is editability. Adobe isn’t chasing viral AI tricks, it’s giving professionals tools they can refine, tweak, and control.
Document Cloud is another lever. As digital workflows replace paper, demand for Acrobat and Sign continues to grow, especially in regulated industries.
Experience Cloud may be the dark horse. As marketing spend continues shifting toward data-driven personalization, Adobe’s enterprise tools become increasingly central to digital strategy.
Together, these levers provide both breadth and depth and position Adobe for sustained growth, even as it navigates disruption.
Adobe allocates capital with discipline.
R&D spending runs at 16–17% of revenue, well above peers. This has kept Adobe ahead of industry shifts, from mobile to cloud to now AI.
M&A is opportunistic but focused. The failed Figma deal showed ambition, but most acquisitions, like Workfront, are bolt-ons that enhance capabilities without overleveraging the balance sheet.
Share repurchases are the primary return mechanism. Adobe doesn’t pay a dividend, preferring to reinvest and buy back shares consistently. Over 90% of capital return comes via buybacks.
It’s a playbook we like: high internal reinvestment, selective M&A, and strong alignment between incentives and long-term performance.
Adobe’s financial strength is a significant advantage.
The company has operated with a net cash position for most of the past 15 years. Free cash flow conversion exceeds 100% of net income, driven by low capital intensity and minimal working capital needs.
This allows Adobe to self-fund growth, navigate downturns without pressure, and remain front-footed in M&A and product development.
No compounder is risk-free. For Adobe, three areas warrant close attention.
First, AI-native disruption. Tools like Canva and Runway are evolving fast. If Adobe doesn’t continue to differentiate, especially for professional users, parts of its moat could erode. We see Adobe as most vulnerable in the ideation phase of workflows.
Second, enterprise IT budgets. Experience Cloud relies on ongoing investment in marketing infrastructure. Any slowdown here could soften growth.
Third, platform dependence. Adobe’s tools run on Apple, Microsoft, and Google ecosystems. Changes in policy or ecosystem rules could affect distribution or cost structures.
These risks are real, and the market is already pricing them in. But they are execution risks, not structural flaws.
To ensure our thesis is on track, we monitor a few Key Performance Indicators that reflect the health of Adobe’s business model. Revenue growth, gross margins, and free cash flow conversion provide a clear signal of whether Adobe is maintaining its strategic edge and financial discipline.
The graphic below outlines the thresholds we use when tracking these KPIs:
At the time of writing, Adobe trades at a valuation that reflects considerable uncertainty, particularly around the impact of AI.
But the business remains exceptional: high visibility, strong margins, and dominant market share. If Adobe continues to execute, particularly around Firefly and enterprise expansion, it has a clear path to compounding through the next cycle.
The market may be overly focused on disruption. We’re focused on reinvestment and retention. For patient capital, Adobe remains a compelling long-term hold.