Adobe at 13x Earnings: The Free Photoshop Clone Was Never the Risk
Two demonstrations this fall told software investors the same story, and the market heard it loud. In September, screenshots circulated of Grand Theft Auto V running natively on an iPhone, an unofficial project that had not yet posted gameplay footage. Weeks later, a software engineer named Brandon Thomas released seven free, open-source clones of Adobe's entire suite - a Photoshop, an Illustrator, a Premiere, an After Effects - built with an AI model and written in Rust. Thomas's declared motto for the project, called ArtCraft: "Software is over."
The market has mostly agreed. Adobe shares fell 32% over the past twelve months. Ainvest data put the stock near $238, around 13x forward earnings. The logic seems airtight: when one engineer sets out to rebuild your flagship suite and give it away, the case for a premium software multiple dies.
Apply the abundance-scarcity test and the read turns upside down. The rule: when a thing becomes abundant, the investment is in what becomes scarce in the process. AI just made the supply of code nearly free. What it did not make free is distribution, brand trust, enterprise support, the file compatibility that your whole team's work lives inside, and the workflow lock-in where your projects already sit. Those were always Adobe's moat. The code was never the moat.
So how real is the clone? Partly real. Thomas himself calls ArtCraft "very alpha" - glitchy tool behavior, unpredictable features. Adobe holds thousands of patents covering the very workflows the clones imitate, and the legal exposure is already there. The free apps are funded by a separate business selling tokens for AI image and video models. That is a visible, directional threat, not yet a finished product that has measurably taken Creative Cloud share.
The thing that actually beat Adobe's stock was not the clone. It was deceleration. Adobe projected roughly 10.2% annual recurring revenue growth for the full year, but Wells Fargo, downgrading the stock two notches to Underweight this week, estimated that organic net new annual recurring revenue fell more than 40% in the September quarter and that Adobe would need to nearly double Q4 net-new ARR to reach its own targets. Wells Fargo also flagged that the Semrush acquisition added about $480 million in revenue, masking slower growth in the core business. The multiple collapsed because the growth engine slowed - not because a free Photoshop appeared.
Strip the fear out and the underlying economics are not those of a dying asset. Subscriptions made up 96% of Adobe's $23.8 billion in fiscal 2025 revenue. Ainvest data shows gross margins near 89%, free cash flow margins around 40%, and return on invested capital above 40%, with revenue still growing roughly 12% year over year. One Seeking Alpha analysis concluded the current price implies the company grows only about 3% a year through fiscal 2030.
That gap is the whole debate. At 13x forward earnings you are being paid to believe the destruction narrative in full - a business in structural decline - while the operating data shows a company that kept its margins and returns on capital and whose problem is a sales-and-monetization slowdown, not survival. The variable that settles it is net new ARR. If organic ARR stabilizes at a high level, the low-teens multiple is overstating the risk. If the ARR slide continues and Adobe's AI features fail to bring in durable paid usage, then the market caught the real disease - even if it told the wrong story to explain it.
Every eye is on the free clone. The number that actually decides the trade is the quarter-over-quarter job of net new recurring revenue. When the crowd is watching one thing and the data lives in another, that gap is where the work is.
