2 Great Tech Stocks to Buy Now Down 65% and 35%: ADBE, MSFT

Microsoft is down roughly 35% from its October 2025 highs amid investor concerns over AI data‑center capex, while Adobe trades at a 12.0X forward P/E (its lowest since 2008). Adobe grew Q1 FY26 subscription revenue 13%, tripled its AI‑first ARR, and is projected to grow revenue ~10% in FY26 and ~9% in FY27; Zacks’ average target implies ~40% upside and ~180% to return to 2021 highs. Microsoft reported Q2 FY26 cloud revenue up 29% to $32.9B (Azure +39%), is projected to grow revenue ~16% in FY26 and ~14% in FY27 with adjusted EPS growth of ~25% then 10%, and Zacks’ average target implies ~61% upside.

Analysis

Market moves have created a clean bifurcation: incumbent software franchises face near-term skepticism while AI-infrastructure beneficiaries are being re-priced for execution risk. That re-pricing amplifies second-order flows — outsized capex at hyperscalers will mechanically boost demand (and pricing power) for GPU cycles, colo capacity and specialist system integrators for the next 12–24 months, even as software margins compress from accelerated R&D and amortization timing. Adobe sits on the favorable side of content capture — if it can convert “AI-first” usage into higher ARPU and lower churn the cashflow profile should re-rate materially over 12–36 months; conversely, aggressive SMB/creator AI offerings could compress legacy permissioning/licensing economics and produce faster-than-expected ARPU erosion. For Microsoft the immediate risk is not product-market fit but balance-sheet cadence: front-loaded infra spending plus partnership revenue-recognition ambiguity creates a visible earnings-fatigue window over the next 2–8 quarters that could reverse quickly if either Azure efficiency per AI dollar or OpenAI monetization surprises positively.

Key catalysts to watch are concrete unit-economics signals rather than top-line growth: AI gross margin per dollar of incremental ARR, incremental CPU/GPU hours sold per month, and any S-4/partner revenue recognition clarifications. Tail risks include a sudden correction in AI training demand (macroeconomic or policy-driven) that would leave hyperscalers holding stranded capacity, and competition risk where lightweight prompt-driven creative tools undercut Adobe’s high-end pricing faster than the company can upsell. Near-term volatility should be treated as a source of trade entry, not proof of thesis failure — the actionable window is 3–24 months depending on whether you want to play optionality (options) or cash flow re-rating (equity).

Key Decisions for Investors

• Long ADBE via a funded LEAP call spread (buy 24–30 month LEAP calls, sell a higher strike 24–30 month call) sized 3–5% of NAV; target asymmetric payoff: 2–4x upside if Adobe converts AI-usage to ARPU within 12–24 months. Hedge: if position rallies >40% take 30–50% off; stop-loss: 20% below entry funded by closing the long leg.
• Relative-value pair: long ADBE / short MSFT equal-dollar exposure for 6–18 months (size 3% NAV each) to express a view that software monetization > infra monetization. Rationale: protects against broad AI froth collapse while capturing re-rating if content-first monetization outperforms infrastructure spend. Close if MSFT demonstrates sustained >+10% QoQ margin recovery or ADBE misses two consecutive quarterly ARPU inflection metrics.
• Income-funded MSFT long: buy a 24-month LEAP call and sell rolling 3–6 month OTM calls to fund cost (size 4–6% NAV). This expresses long-term conviction while harvesting premium to lower carry; maintain a 10% NAV cash buffer to meet assignment if short calls are exercised around earnings.
• Protective hedge for hyperscaler risk: purchase a 6–9 month MSFT put spread (buy nearer-term put, sell lower strike) sized to cap portfolio drawdown to target (e.g., cost ~0.5–1% NAV) ahead of major AI-capex cadence updates or OpenAI accounting disclosures. This limits downside while keeping upside optionality.