Key insights
- The author presents a bullish case for Adobe despite a recent stock decline following Q1 FY2026 earnings. The core argument is that increased Firefly credit consumption per user (ARPU expansion) can offset potential seat erosion. Key metrics to watch in Q2 earnings (June 11) are RPO growth ≥10% YoY and Firefly ARR QoQ growth ≥30%. This suggests a potential positive catalyst for Adobe and the broader software sector if these targets are met.
I wrote up a primary source thesis on Adobe ($ADBE). Short version:
Adobe reported Q1 FY2026 on March 12. EPS $6.06 vs $5.87 estimate. RPO $22.22B growing 12.8% YoY. Firefly ARR crossed $250M at 75% QoQ growth. Guidance reaffirmed in full. Stock fell 7.59%.
The market is applying a seat-count framework to a business whose reported numbers show consumption acceleration. Those are two different models of the same company.
Three reasons the multiple is where it's at:
- Cohort drag: IGV ETF declined ~30% from its September 2025 peak, and Adobe sold with the category regardless of fundamentals * AI displacement narrative: the market assumes fewer seats equals less revenue, reported numbers show the opposite mechanic * CEO uncertainty: Narayen's departure was announced on the same call, guidance reset risk sits in the multiple until a successor speaks
The bear case and the bull case are the same mechanism. Fewer seats × higher Firefly credit consumption per remaining seat = ARPU (average revenue per user) expansion. At 20% annual ARPU growth, seat erosion must exceed 17% annually before net Creative revenue declines. At 50% growth, the break-even is 33% erosion. Q1 credit consumption was running at 45% QoQ.
Next gate: Q2 earnings June 11. Two conditions, both required: RPO ≥10% YoY and Firefly ARR QoQ ≥30%. Full write-up with crossover math, comp table, and break conditions here: https://darrenleung1.substack.com/p/adbe-the-bear-case-accelerates-the
Happy to get pushback on the ARPU growth assumption or the agentic credit consumption argument.