Categories Analysis, Technology

With new apps and AI push, Adobe looks prepared for new opportunities

The stock dropped after the earnings announcement last week, despite strong results and positive guidance

Adobe Inc. (NASDAQ: ADBE) has expanded its subscriber base steadily in recent years as more and more enterprises adopted software-as-a-service apps and systems to optimize their business functions. The design software firm is currently focused on incorporating generative artificial intelligence across the portfolio, and a key priority is to make Adobe applications available to a broader set of users through innovation and new applications.

Stock Dips

Last week, Adobe’s stock suffered a selloff despite the tech firm reporting strong results for the third quarter and issuing reasonably good guidance. While the numbers topped expectations, it looks like the market was expecting a better outcome. The stock had started experiencing weakness ahead of the earnings as investors booked profit after it climbed to a near-two-year high. However, the outlook on ADBE is bullish because it has the potential to recoup the lost strength and continue growing.

The Adobe Creative Cloud got a major boost from the introduction of advanced applications like Express and Firefly, which have been a hit among users since the recent launch. Firefly-powered features are integrated into Creative Cloud Apps to deliver more creative power to users. Continued heavy investments to enhance the technology platform should help the company take full advantage of the shift to AI-supported design. Also, the recent price hike, which will come into effect later this year, would drive margin growth.

Strong Q3

In the August quarter, revenues came in at $4.89 billion, compared to $4.43 billion in the same period of last year. Revenues of Digital Media and Digital Experiences, the main business segments, rose 11% and 10% respectively. That was partially offset by a 17% fall in Publishing and Advertising revenue. Revenues grew across all geographical divisions.

The top-line growth translated into a 20% growth in adjusted earnings to $4.09 per share. On an unadjusted basis, net income was $1.40 billion or $3.05 per share, compared to $1.14 billion or $2.42 per share in the year-ago period. The numbers came in above analysts’ forecast, continuing the long-term trend.

From Adobe’s Q3 2023 earnings call:

“On the Creative side, digital content creation and consumption are exploding across every creative category, customer segment, and media type. Creative Cloud is the leading creativity platform, offering a comprehensive portfolio of products and services for every discipline across imaging, photography, design, video, animation, and 3D. We’re excited about the growth we are driving with our creative flagship products, and with Adobe Express, our AI-first, all-in-one creativity app that makes it fast, easy, and fun for any user to design and share standout content.”

What’s in Cards

Anticipating the momentum to continue, the management expects revenue to be in the range of $4.975 billion to $5.025 billion in the final three months of the fiscal year. The guidance for fourth-quarter adjusted earnings per share is $4.10-$4.15. The company is looking for Digital Media Net New ARR of approximately $520 million for Q4.

The post-earnings downturn continued on Monday and Adobe’s stock traded lower in the early hours of the session. In the past six months, ADBE has grown about 50%.

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