Despite cautious guidance, Adobe may continue AI-driven growth

Adobe Inc. (NASDAQ: ADBE) has reported record-high revenues for the most recent quarter but issued fourth-quarter guidance that fell short of expectations, raising concerns about the prospects of its AI business. However, the company’s key growth drivers look intact, as recent advancements in AI deployment across Creative Cloud, Document Cloud, and Experience Cloud continue to enhance user experience.

Shares of the San Jose-headquartered design software maker have lost about 10% since the earnings announcement, reversing most of last month’s gains. Around $530, the last closing price broadly matched its value from a year earlier. The company is busy exploring options to effectively monetize its AI offerings, which have significant potential to drive shareholder value.

Record Revenue

Revenues came in at a record high of $5.41 billion in the third quarter of fiscal 2024, up 11% from the same period last year. Driving the top-line growth, Digital Media and Digital Experience revenues grew 11% and 10% respectively. Earnings, adjusted for one-off items, rose to $4.65 per share in Q3 from $4.09 per share last year. Unadjusted net income was $1.68 billion or $3.76 per share, compared to $1.40 billion or $3.05 per share in Q3 2023. Both earnings and revenue surpassed the market’s projections, as they did in every quarter in the past several years.

From Adobe’s Q3 2024 earnings call:

“We are amplifying creativity and productivity by enabling the convergence of products like Photoshop, Express, and Acrobat as knowledge workers and creatives seek to make content more compelling and engaging. We’re bringing together content creation and production, workflow, and collaboration, and campaign activation and insights across Creative Cloud, Express, and Experience Cloud. New offerings including Adobe GenStudio and Firefly Services empower companies to address personalized content creation at scale with agility and enable them to address their content supply chain challenges.”

Adobe has emerged as a dominant player in generative AI software, reinventing its popular products by incorporating several useful features. They are contributing to subscription growth, which in turn translates into revenue growth. The negative investor reaction to the management’s soft fourth-quarter guidance seems to be overblown. The company has the potential to overcome short-term headwinds, thanks to its strong fundamentals and continued dominance in the creative software industry.

Guidance

For the fourth quarter, Adobe leadership forecasts revenues in the range of $5.50 billion to $5.55 billion, which is below analysts’ consensus estimates. Reported and adjusted earnings per share are expected to be $3.58-3.63 and $4.63-$4.68, respectively. The management is looking for a Digital Media Net New ARR of approximately $550 million for the fourth quarter. The company attributes its cautious top-line guidance largely to the unfavorable timing of Cyber Monday.

ADBE traded slightly above $530 on Monday morning, which is below the stock’s 52-week average price. It has gained about 7% in the past six months.