One continuing debate about generative artificial intelligence and the software sector is whether the trend helps or hurts Adobe, the leading provider of creative software tools such as Photoshop, Illustrator, and InDesign.
Adobe’s office in Bangalore, India. Some investors are nervous about the outlook for the stock given tools available from AI-focused software companies.
Adobe shares slipped when the first wave of text-to-image tools appeared a year or so ago. But the stock surged as Adobe took an aggressive stance to rolling out its own AI products, focusing in particular on serving corporate customers and indemnifying them against any potential intellectual-property litigation. The company’s Firefly suite of AI tools includes features like text-to-image functionality and AI-powered photo editing.
More recently, some investors have become nervous again, given the continued progress of tools from AI-focused software companies. OpenAI’s Sora, stunning text-to-video software that it has demonstrated but not rolled out commercially, is a particular worry.
While Adobe shares were up about 72% over the past 12 months as of the close on Wednesday, the stock was down 3.9% so far this year. Other AI stocks had racked up huge gains: Super Micro Computer was up 318%; Nvidia, 84%; Arm Holdings, 85%; Dell Technologies, 44%; and Palantir Technologies, 46%.
Investors will get new insights into the Adobe story when the company reports its financial results after the close of trading Thursday.
For the February quarter, Adobe has projected revenue of $5.1 billion to $5.15 billion, with an adjusted profit of $4.35 to $4.40 a share. The consensus calls among Wall Street analysts tracked by FactSet are for revenue of $5.14 billion and an adjusted profit of $4.38 a share.
The company expects revenue from its digital-media segment of between $3.77 billion and $3.82 billion, while the Street sees $3.79 billion. Management expects revenue from the digital-experience segment of $1.27 billion to $1.29 billion, a call that more or less matches the Street consensus for $1.28 billion.
Adobe also has projected net new digital-media annualized recurring revenue—a closely watched measure of the growth of the company’s subscription business—of $410 million.
For the May quarter, Street consensus estimates call for revenue of $5.31 billion, including $3.9 billion from the digital-media segment and $1.33 billion from the digital experience segment. The adjusted profit is expected to come in at $4.38 a share.
For the November 2024 fiscal year, Adobe’s guidance calls for revenue of $21.3 billion to $21.5 billion, digital-media revenue of $15.75 billion to $15.85 billion, digital-experience revenue of $5.275 billion to $5.375 billion, and net new digital-media annual recurring revenue of about $1.9 billion. The company sees full-year profits on an adjusted basis of $17.60 to $18 a share.
RBC Capital analyst Matthew Swanson, who rates the stock at Outperform with a target of $650 for the price, said in a research note that he expects solid results. Annualized recurring revenue from digital media could come in higher than expected, he said.
While Swanson thinks the numbers should be positive, what will really matter will be the underlying drivers of the results, he said. In particular, the RBC analyst said, investors want to see “the incremental benefit from GenAI models and runway for future model rollouts particularly video, which has become a growing topic of investor interest following competitive product launches.” Sora is the biggest concern.
“This feels like a similar conversation to the one we were having about generative images a year ago, and would expect management to emphasize their focus on delivering an integrated enterprise-grade solution as opposed to being first to market,” Swanson wrote.
Citi analyst Tyler Radke has a Neutral rating on Adobe shares, and recently trimmed his target for the stock price to $628, from $632. He also sees a respectable quarter for Adobe, aided by price increases and “solid new user acquisitions.”
But he too noted that the OpenAI Sora launch has been weighing on Adobe shares. “We believe the industry developments are unlikely to have a near-term impact on numbers, though we do see greater long-term competitive uncertainty,” Radke wrote. He said he sees risks that Gen AI-driven competition could pressure the stock’s price relative to earnings over time.