I have held Adobe $ADBE for a long time and it is by far the worst position in my portfolio. The company is interesting precisely because it is a nice test of whether cheap and value are the same thing.

The company's numbers look good. For the second fiscal quarter, Adobe reported record revenue of $6.62 billion, up 13% year-over-year. Total recurring revenue climbed to $27.1 billion, and AI-powered products exceeded $500 million in annual recurring revenue for the first time, more than triple last year. The company raised its full-year outlook and maintains an operating margin around 45%. In April, it announced a $25 billion share buyback, nearly a quarter of its market value.

Still, the stock trades about 26% below its 52-week high and trades at a P/E of around 11 against this year's earnings outlook. That is a multiple typically given to cyclical companies, not a software company with a gross margin around 89%.

I think the market is dealing with two things at once. The first is the concern that generative AI will undercut exactly what Adobe sells. The second is leadership. In March, Shantanu Narayen announced he will step down as CEO after eighteen years, a successor has not been named, and the company is also searching for a new CFO.

That discount seems to me less about AI and more about nobody knowing who will run Adobe next year and with what strategy. Until that is clear, I don't think the multiple will recover, even if revenue keeps growing by a tenth a year.

But from this year's low, the stock is up about 4O%. Someone had the courage to buy that risk and has made money so far.

What do you think? Is Adobe cheap quality that the market has oversold, or a company whose business AI is eating away and that will stay cheap for years?