When it comes to generative artificial intelligence (AI), one company that has been at the forefront on the software side is Adobe (ADBE -8.47%). 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.
Solid growth, but guidance disappoints
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.
Image source: Getty Images.
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.
| Metric | Fiscal Q4 Forecast |
|---|---|
| Revenue (in billions) | $5.50 to $5.55 |
| Digital media segment revenue (in billions) | $4.09 to $4.12 |
| Digital experience segment revenue (in billions) | $1.36 to $1.38 |
| Adjusted earnings per share | $4.63 to $4.68 |
| Digital media net new ARR (in millions) | ~$550 |
Will the stock be an AI winner?
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.
ADBE PE Ratio (Forward 1y) data by YCharts.
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.
I think investors can take advantage of the recent price dip and buy this AI winner.
