Software companies have delivered strong returns, with the industry gaining 45.5% over six months, outperforming the S&P 500 by 24.4 percentage points. However, investors should be selective as AI threatens to commoditise many software products. Adobe faces challenges with average billings growth of just 11.9% over the past year and estimated sales growth of 9.4% for the next 12 months, suggesting slowing demand. Its operating margin failed to improve year-over-year. Bandwidth showed weak annual revenue growth of 11.9% over two years and a low gross margin of 37.2% compared to competitors. Its operating margin remained flat. Upstart, an AI-powered lending platform, appears more promising. The company uses over 2,500 data variables and machine learning to help banks assess borrower risk for various loan types.

Adobe's revenue grew 12% over the last year, slower than most software peers. The stock fell 35% over the past year, while the S&P 500 returned 17.7%. Adobe now trades at 12.5 times earnings, against 22.1 for the index. Management highlighted its AI-first products, which exceeded $650 million in annual recurring revenue in fiscal Q3 2026. That figure grew more than 150% year-over-year, compared to 11.2% growth for Adobe's total ARR. However, AI products represent only about 2.4% of Adobe's $27.5 billion total ARR. Adobe is pursuing user adoption over pricing, with monthly active users of free creative tools surpassing 100 million, up more than 70% year-over-year. Net new ARR declined 36% to 37% as the company focuses on converting free-tier users.

Adobe shares trade at $235.47 after falling 33% over the past year, whilst the S&P 500 rose 17%. The creative software maker reported third-quarter revenue up 12.9% to $6.76 billion and non-GAAP earnings per share of $6.13, its fifth consecutive beat. Despite raising full-year guidance to $24.45-$24.50 per share and AI-first annual recurring revenue topping $650 million with growth exceeding 150%, investors remain cautious. Concerns centre on new chief executive Anil Chakravarthy's transition, generative AI competition, and whether 100 million freemium users will convert to paid subscriptions. The stock trades at nine times forward earnings with a price-to-earnings-growth ratio of 0.58. Analysts' average price target of $278 suggests 18% upside potential.