Why Adobe Stock Dropped So Much Today

After the closing bell on Thursday, Adobe (ADBE -9.28%) reported fiscal third-quarter results that beat analysts’ expectations. Despite that, shares of the business software company were trading more than 9% lower on Friday afternoon, and it appears that the company’s disappointing guidance for the current quarter was the key driver of the sell-off.

Unexpected headwinds

In the period ended Aug. 30, Adobe turned $5.41 billion in revenue into operating/non-GAAP earnings of $4.65 per share. Both figures were well up on the prior year’s results of $4.89 billion and $4.09 per share, and beat analysts’ consensus expectations for a top line of $5.37 billion and profit of 4.53 dollars per share.

However, the company’s short-term outlook left much to be desired. For its fiscal fourth quarter, which ends in November, Adobe expects to report sales of $5.5 billion to $5.55 billion and non-GAAP earnings per share of $4.36 to $4.68. Analysts’ consensus estimates for the fourth quarter were $5.61 billion and $4.67, respectively.

Notably, Adobe’s projection that its digital media arm’s annual recurring revenue rate would come in at just $550 million in the fourth quarter was well short of analysts’ expectations of $561.1 million, suggesting the company doesn’t get as much traction as originally hoped for from some of them. newer software powered by AI.

Too much uncertainty to own Adobe stock

That is not an unreasonable concern.

Adobe is practically royalty in the world of business software. It invented PDF (Portable Document Format) back in 1991, and its Photoshop software has long been the workhorse of choice for most professionals in the world of digital design, layout, and photography. The 2017 introduction of its Experience Cloud platform was also revolutionary at the time, allowing users to create unique digital/web experiences for each consumer.

However, the business of software and cloud services has continued to evolve in the meantime, especially thanks to generative artificial intelligence. While it wouldn’t be fair to say Adobe hasn’t evolved as well, recent industry developments have spawned rivals that offer new tools that can do many of the things Adobe does.

That doesn’t mean Adobe is no longer competitive. Indeed, it is still quite competitive and is the leading name in certain segments of the software arena. Even with weak guidance for the fourth quarter, it’s still expected to grow 20% this fiscal year and another 11% next year. His earnings are likely to rise as much.

However, Adobe’s generative AI offerings are not convincingly dominating their niches to the extent that investors seem to have expected. Until the company’s competitiveness on this front can be accurately assessed, Adobe stock will not be easy to own.