Adobe's Q3 Performance and AI Ambitions: A Mixed Bag for Investors

This Beaten-Down Tech Stock Is a Coiled Spring for Decades of AI-Fueled Growth | The Motley Fool

Here's why Adobe is a top growth stock to buy now and what to look for from the enterprise software company. Adobe reported record third-quarter revenue but guided for just $5.5 billion to $5.55 billion in fourth-quarter fiscal 2024 revenue and non-GAAP (adjusted) earnings per share (EPS) of $4.63 to $4.68. In its June report, Adobe guided for full-year revenue of $21.4 billion to $21.5 billion and non-GAAP EPS of $18 to $18.20. Through the end of its third quarter, Adobe generated $15.9 billion in revenue and $13.61 in non-GAAP EPS. Factoring in its updated Q4 guidance, the midpoint of Adobe's full-year projections calls for $21.43 billion in revenue and $18.27 billion in non-GAAP EPS -- which is in line or even a little bit better than its prior forecast. Investors may have been expecting accelerating growth from Adobe given that the stock was up nearly 28% between June 13 and Sept. 12 -- which was the period before the second-quarter print and its recent report. Expectations aside, the bigger issue is that Adobe's growth is slowing. The company is on track for the second consecutive year of 10% or so year-over-year revenue growth. Data source: Adobe. Although Adobe is growing earnings faster than revenue, the pace of top- and bottom-line growth just isn't good enough to justify Adobe's premium valuation. But there's reason to believe that the growth rate could pick up and make Adobe look like a better value. Adobe was a pioneer in the software-as-a-service business model, releasing its bundled offering called Creative Cloud in 2012. The strategy catapulted Adobe to the software giant it is today. Although Adobe has released new products and improved existing tools, it has largely been coasting for several years thanks to its wide moat and entrenched position. Artificial intelligence (AI) has opened the door to arguably the most significant product upgrades since the company launched Creative Cloud. Adobe has integrated AI functionality across its flagship products, offers subscription add-ons for AI assistants, and has released entirely new products like Adobe Firefly -- a generative AI tool for images, vectors, designs, and videos. Adobe deserves credit for innovating rapidly. But these improvements have come at a cost, as Adobe's operating expenses outpaced its revenue growth over the last three years. Short-term-focused investors may look at Adobe's cost profile, lackluster growth, and valuation and choose to pass on the stock. However, patient investors could benefit by thinking about what will drive long-term returns for the company. At its core, Adobe wins when its customers produce higher-quality and higher-quantity work. If AI can help creative teams accomplish complex tasks and handle basic tasks faster, then it stands to reason that Adobe could justify price increases. In other words, Adobe needs to deliver value to its customers, especially given that alternative solutions are often cheaper than Adobe's offering. Creative Cloud costs $59.99 per month for individual users. Adobe heavily steers buyers toward the bundled option with relatively high pricing on individual apps, such as $22.99 each for Photoshop, Premier Pro, Illustrator, After Effects, InDesign, and others. Adobe has been developing new tools to strengthen the Creative Cloud bundle and help justify price increases. For example, AI Assistant for Acrobat costs $4.99 per month and uses AI to answer questions and provide summaries. This can be an invaluable tool when tasked with a long and complex document. Adobe Express is $9.99 per month and is built for mobile, allowing users to design flyers, resumes, TikToks, and Instagram Reels. By developing new tools that enhance its core offering, Adobe can grow its recurring revenue and reduce its dependence on legacy apps. Instead of focusing on Adobe's near-term results, investors should turn their attention to Adobe's innovation and AI monetization. Adobe is making improvements to help marketing and creative teams save time and enhance the quality of their work. The benefits of this approach may not be seen in the near-term results. However, over the long term, this is the exact kind of strategy that can unlock sustainable growth and position Adobe to handle its own against the competition. Add it all up, and investors are getting an excellent opportunity to buy Adobe while it is still in the early stages of its AI-driven evolution.

3 Reasons Why Adobe Stock Could Continue to Fall, and 2 Reasons It's Still Worth Buying Now | The Motley Fool

Adobe stands out as a great way to invest in generative AI as it relates to the creative space. Share prices of Adobe (ADBE -2.86%) sold off after the company reported its fiscal 2024 third-quarter results on Sept. 12 and management offered weak guidance for the rest of the year. The stock now trades down by more than 10% year to date compared to an over 14% gain in the tech sector and a 17.8% gain for the Nasdaq Composite. Yet despite some notable challenges that could weigh down the growth stock in the near term, Adobe is worth buying now. Here are three reasons why. Based on updated fiscal fourth-quarter guidance, Adobe management expects the company to book $21.43 billion in revenue and $18.27 in non-GAAP (generally accepted accounting principles) earnings per share (EPS) for fiscal 2024. If it hits that goal, its revenue would be just 10.4% higher than fiscal 2023, marking another year of slowing growth. Based on its non-GAAP fiscal 2024 earnings guidance, Adobe would have a price-to-earnings ratio of 29.4, which isn't bad for an industry-leading growth company. But it's worth noting that Adobe's GAAP earnings tend to be about 30% to 40% lower than its non-GAAP earnings. In fiscal 2023, Adobe earned $11.82 in GAAP diluted EPS, but $16.07 in non-GAAP diluted EPS. Stock-based and deferred compensation accounted for a whopping $3.78 per share -- the vast majority of the adjustment. Like other tech companies, Adobe has a sizable stock-based compensation program to attract top talent and compensate them with equity in the company. It has been increasing its pace of share buybacks to help offset the dilution caused by that stock-based compensation, but it's still an expense worth following since it heavily impacts Adobe's earnings. In sum, Adobe's sales and earnings growth over the last couple of years have been unimpressive, especially relative to other tech companies that benefit from artificial intelligence (AI). For years, Adobe reaped the benefits of owning a suite of industry-standard software programs such as Photoshop, Illustrator, Acrobat, and InDesign. Just as being proficient in Microsoft Excel or PowerPoint looks good on a business professional's resume, knowledge of Adobe's products can be a basic requirement for many jobs in the creative sector. There are a lot of advantages to being the default product in a category. However, sometimes, those advantages can lead companies to become complacent, less innovative, or operationally inefficient. Before 2023, Adobe relied heavily on its entrenched position rather than ensuring it still had the best offerings. That advantage is no longer good enough. Competition has gone up a notch, especially in recent years. The biggest threat to Adobe is probably Canva, which is a far cheaper yet effective solution. Canva Pro is just $15 per month per person -- a quarter the price of Adobe's creative cloud. Canva has tools for document presentations, social media, videos, websites, and more. It also has generative AI tools that directly compete with Adobe's solutions. The software in Canva's product suite is still a step below Adobe's. But if it innovates faster than Adobe, the price difference could make it a compelling alternative, giving it a greater opportunity to eat away at Adobe's market share. Another threat to Adobe is its business model. Adobe launched Creative Cloud in 2012 and pivoted to offering its suite of applications via subscriptions. That was arguably the greatest decision in the company's history. The software-as-a-service business model creates predictable recurring revenue and can open the door to steady growth. However, if Adobe's product improvements eventually allow one user to do the work that used to take two or three users, then the subscription price would have to go up a lot to offset its shrinking user count. This type of threat is something that all enterprise software companies need to be concerned about, not just Adobe. Although it's still way too early to see signs of this happening, it's still something worth paying attention to. Despite its sluggish growth, expensive valuation, competition, and the uncertain future of Adobe's business model, I still think the stock is an excellent buy now. Here are two reasons why: The stock's balance of risk vs. potential reward should be highly attractive for investors who believe in Adobe's ability to innovate and monetize AI. However, it could take years for the company to complete that leap. And for investors who don't think Adobe can kick its business into a new gear, I'd say it would be better to pass on the stock at this time.

Can Adobe Become an AI Winner? | The Motley Fool

When it comes to generative artificial intelligence (AI), one company that has been at the forefront on the software side is Adobe (ADBE -0.10%). The company has added a number of AI-related features to both its Creative line of products, such as Photoshop, and its Acrobat-led Document Cloud business. While the company has been seeing some benefits from AI, the stock took a hit after the company's fiscal third-quarter results. It's now down about 10% on the year. Let's take a closer look at the company's most recent results and see if the stock is still on track to be an AI winner. Adobe grew its fiscal Q3 revenue nicely by 11% to $5.41 billion, which was above the company's guidance range of $5.33 billion to $5.38 billion. Adjusted earnings per share (EPS), meanwhile, increased 14% to $4.65, ahead of the company's $4.50 to $4.55 forecast. Digital media segment revenue climbed 11% to $4 billion. Within the segment, Creative revenue rose 10% to $3.19 billion, while Document Cloud revenue grew 18% to $807 million. The company credited growth in creative revenue to new subscriptions helped by interest in AI features such as generative fill-in Photoshop. Meanwhile, for Document Cloud, the company said its AI voice assistant, multi-document support, PDF collaboration, and voice-enabled conversations on Android devices were all helping drive engagement. Its digital experience segment saw revenue rise 10% to $1.35 billion, with digital experience subscription revenue up 12% to $1.23 billion. The company said it is seeing strong growth from its Adobe Experience Platform (AEP), as well as with Adobe Experience Manager and Workfront. The company recorded $504 million in new digital media annualized recurring revenue (ARR), ending the quarter with digital media ARR of $16.76 billion. Looking ahead, Adobe forecast fiscal fourth-quarter revenue of between $5.5 billion and $5.55 billion, representing growth of between 9% to 10%. It projected digital media segment revenue of between $4.09 billion to $4.12 billion and digital experience segment revenue of between $1.36 billion to $1.38 billion. It forecast adjusted EPS of between $4.63 to $4.68. This biggest issue, though, was the company's projection of about $550 million in new digital media ARR for the quarter. In Q4 of last year, the company generated $569 million in new digital media ARR, so this would be a deceleration and could lead to lower revenue growth in the future. Adobe said the lower new ARR forecast was due to timing issues, such as Cyber Monday falling into the next quarter this fiscal year. On its earnings call, the company highlighted both future AI innovation and ways for it to help drive growth from both a marketing and monetization perspective. On the innovation front, Adobe is turning toward video. It discussed its new Firefly video models. The company recently previewed the upcoming offering, which will include such features as text-to-video, being able to remove objects from scenes, and smoothing jump-cut transitions. On the monetization front, Adobe currently uses a credit model, and it said it is seeing total credits consumed rise. However, it also said it is monitoring how the economy of generative credits evolves, and it's looking at alternative options such as offering premium AI subscription plans. A better monetization strategy should help boost the company's growth. At the same time, it is leaning into marketing around AI, especially around its Express products, which are aimed more toward individuals and non-creative professionals to help them create things like more visually stunning social media posts and flyers. This is a nice new potential area of growth for the company. From a valuation perspective, Adobe currently trades at a forward price-to-earnings (P/E) ratio of 26 next year's analyst estimates and a price-to-sales (P/S) multiple of 10. That's a pretty fair valuation for a software-as-a-service (SaaS) company growing its revenue in the low double digits. While investors may have been disappointed with Adobe's new Q4 ARR guidance, the shift of Cyber Monday falling into fiscal 2025's first quarter could certainly play a role, as the company's products do attract a lot of hobbyists and individual creatives. I wouldn't be too concerned with this number, and would be more focused on the new innovations and a better AI monetization strategy. I think those can drive the stock higher.

Adobe (ADBE) Stock: Time To Get Greedy (Rating Upgrade)

Shares of Adobe (NASDAQ:ADBE) crashed 9% on Friday after the software maker submitted a weaker-than-expected revenue outlook for the current quarter. Overall, Adobe's third-quarter results were overall solid as the company continues to scale its AI offers and sees strong momentum in its biggest segment, Digital Media. Adobe also benefited from a 1 PP revenue acceleration compared to the prior quarter and increased its profitability at double-digits on both an operating and net income basis. Shares are not totally cheap, but cheaper than last week, nonetheless, which is why I recommend investors to buy the drop here. I rated shares of Adobe a buy in July - Adobe: A Generative AI Software Play - as the software company rolled out new products, including in AI, that indicated the potential for user productivity improvements, and because Adobe was seeing solid top-line momentum. This momentum continued in the third fiscal quarter, and I don't believe the revenue outlook for the fourth fiscal quarter was really that bad. Adobe generated strong profitability in the last quarter and investors, in my opinion, are dealing with a dip buying opportunity following the Q3 earnings release. The software maker reported better results on both the top and bottom line for its third fiscal quarter: it achieved adjusted earnings of $4.65 per share on $5.4B in revenue. The EPS figure beat the consensus estimate by $0.11 per share, while the top line came in $35M ahead of the average prediction. Adobe reported strong financial results for its third fiscal quarter, indicating continual momentum in the firm's core Digital Media segment. In the third fiscal quarter (which ended August 30, 2024), Adobe generated $5.41B in revenues, showing 11% year-over-year growth. This growth represented a 1 PP acceleration compared to the previous quarter, chiefly due to business expansion in the Digital Media business. Digital Media comprises Adobe's Creative and Document business which are crushing it, in part due to the roll-out of new AI-specific products such as the introduction of AI assistants in Adobe Acrobat and Reader. As a result, Digital Media revenue increased 11% year-over-year. Both segments are also seeing considerable momentum in net new annual recurring revenues, as Adobe captures revenues mainly through a subscription-based business model. Total subscription revenues hit $5.18B in Q3'24, representing a revenue share of 96%. Further, Adobe significantly improved its profitability in the third quarter, driven by more enterprise clients taking up subscription offers. New and improved products such as Adobe Firefly and various AI offers continue to make the Adobe platform a magnet for creators, which is also resulting in higher operating income. The software maker generated $1.99B in operating income in Q3'24, showing a year-over-year increase of 17%. At the same time, Adobe's net income went up 20% year-over-year to $1.68B. Adobe's main profitability metrics are growing, mainly because the company is doing such a great job scaling its high-margin subscription offers. In the last five years, all major earnings figures - gross profits, operating income, and net income - have drastically improved, and the trends continue to point upward. Adobe projects its fourth-quarter revenue to fall into a range of $5.50-5.55B, which came in below the analysts' average prediction of $5.61B in revenue. The guidance for the current fiscal quarter (Q4) was largely the reason, in my opinion, for the negative price reaction to Adobe's earnings report last week. Considering that Adobe is projected to generate $21.4B, I believe the $85M miss in terms of Q4 revenue guidance should not hold the stock back for long. Adobe is not necessarily expensive, considering that the company is running a highly profitable, subscription-based software platform at scale. Adobe is currently valued at a price-to-earnings ratio of 26X, based off next year's earnings, which compares against a P/E ratio of 28X for Microsoft (MSFT) and 23X for Oracle (ORCL). Both rivals are also highly profitable software companies offering business productivity tools. The industry group price-to-earnings ratio is 26X, while the 5-year average price-to-earnings ratio for Adobe is 30.0X. I believe Adobe could return to its 30X P/E valuation average, considering that it is highly profitable and currently in the early stages of scaling its AI offers. Content creators are going to continue to gravitate to Adobe's creative tools, especially in Digital Media, which should translate into growing subscription revenue growth. A 30X P/E ratio, based off a consensus estimate of $20.55/share, calculates to a fair value in the neighborhood of $617. This implies about 15% upside revaluation potential, but my fair value estimate does not consider an acceleration of Adobe's top line and growing subscription uptake due to AI offers. I also believe that the drop-off last Friday creates a unique buying opportunity for investors that have the desire to invest into an AI software play for the long term. Adobe reported strong financial Q3 results, but there are risks. One risk is the potential erosion of its profitability and margins in case other business software companies offer better and more efficient creator tools with the help of AI. Start-ups now also have the opportunity, leveraging the strength of AI, to compete with large, well-funded software platforms like Adobe or Microsoft. In my opinion, investors overreacted to Adobe's fourth-quarter revenue outlook as the guidance only missed the average prediction by $85M... which is hardly a sum to obsess over considering that the software maker is set to achieve somewhere around $21B in revenues this year. I continue to like that the overwhelming majority of the company's revenues comes from subscriptions, and Adobe operates a high-margin business model. As a result, Adobe is widely profitable and its long-term (and short-term) profitability metrics all point upward. Shares of Abode also used to be more expensive in the past, and the recent drop-off is a buying opportunity for investors. In fact, I believe the best time to buy is often the time when investors panic and are fearful. In my opinion, this is one of such opportunities.

Adobe Outperforms Q3 Estimates But Adjusts Its Guidance To A Challenging Environment - Adobe (NASDAQ:ADBE)

Last Thursday, Adobe Inc ADBE reported its third quarter results, surpassing Wall Street's estimates for both the top and bottom line. However, Adobe's stock got punished for a lighter-than-expected fourth quarter guidance that sparked fears of smaller rivals taking business from software companies like Adobe and Salesforce Inc CRM. Fiscal third quarter highlights For the quarter ended on August 30th, Adobe reported revenue grew 11% to $5.41 billion, topping $5.37 billion that LSEG expected. The biggest line of business, Digital Media, that is home to Creative Cloud subscriptions that use generative artificial intelligence called Firefly, grew 11% YoY, bringing in sales of $3.98billion. Within the digital media segment, creative revenue grew 10% YoY to $3.19 billion while Document Cloud grew 18% YoY to $807 million. The total subscription revenue amounted to $5.18 billion, rising 11% YoY. Digital Experience segment reported revenue rose 10% to $1.35 billion. Net income rose to $1.68 billion with adjusted earnings amounting to $4.65, surpassing $4.53 that LSEG estimated. Adobe demonstrated the strenght from its cash-generation capabilities, $2.02 billion, bringing in cash of $2.02 billion from its operations. Adobe adjusted its outlook to a tough economy. Taking into account current macroeconomic conditions and expected seasonal strength, Adobe adjusted its outlook. For the fourth fiscal quarter, Adobe guided for revenue between $5.5 billion and $5.55 billion, which fell short of FactSet's estimate of $5.6 billion. Digital Media is projected to bring in $4.09 billion to $4.12 billion while Digital Experience segment is expected to report revenue between $1.36 billion and $1.38 billion. Adjusted profit is expected to range between $4.63 and $4.68 per share. Adobe continues to empower its users with the technology of tomorrow. Throughout the third quarter, Adobe outperformed across its key business segmens. More importantly, Adobe continues to integrarte AI across its portfolio. AI-powered enhancements, particularly Adobe Firefly, fueled the increased customer engagement and retention across Creative Cloud, Document Cloud, and Experience Cloud. However, the lighter than expected forecast sparked fears that AI gains will take longer to monetize, especially in the pressured buying environment. DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice. This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy. Market News and Data brought to you by Benzinga APIs