Can Adobe become an AI winner?

When it comes to generative artificial intelligence (AI), one company that has been at the forefront of software is Adobe (ADBE -8.47%). The company has added a number of AI-related features to both its creative product line, such as Photoshop, and its Acrobat-led Document Cloud business.

While the company saw some benefits from AI, the stock took a hit after the company’s third-quarter fiscal results. It is now down about 10% year-over-year. Let’s take a closer look at the company’s latest results and see if the stock is still on track to become an AI winner.

Solid growth, but guidance disappoints

Adobe profitably increased its fiscal third-quarter revenue by 11% to $5.41 billion, which beat the company’s guidance range of $5.33 billion to $5.38 billion. Adjusted earnings per share (EPS), meanwhile, rose 14% to $4.65, ahead of the company’s forecast of $4.50 to $4.55.

Digital media revenue rose 11% to $4 billion. Within the segment, Creative revenue increased 10% to $3.19 billion, while Document Cloud revenue increased 18% to $807 million. The company credited the growth in creative revenue to new subscriptions helped by interest in AI features such as Photoshop’s generative fill. Meanwhile, for Document Cloud, the company said its AI voice assistant, support for multiple documents, PDF collaboration and voice-activated conversations on Android devices all helped drive engagement.

Its digital experience segment saw revenue rise 10% to $1.35 billion, and digital experience subscription revenue rose 12% to $1.23 billion. The company said it is seeing strong growth from Adobe Experience Platform (AEP), as well as Adobe Experience Manager and Workfront.

The company posted $504 million in annualized digital media recurring revenue (ARR), ending the quarter with digital media ARR of $16.76 billion.

Image source: Getty Images.

Looking ahead, Adobe estimates fourth-quarter fiscal revenue of $5.5 billion to $5.55 billion, representing growth of 9% to 10%. It estimated revenues from the digital media segment between $4.09 billion and $4.12 billion and revenues from the digital experience segment between $1.36 billion and $1.38 billion. It estimated adjusted EPS between $4.63 and $4.68.

That biggest issue, however, 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 less revenue growth going forward. Adobe said the new lower ARR forecast was due to timing issues, such as Cyber ​​Monday falling in the next quarter of this fiscal year.

Will the stock be an AI winner?

In its earnings call, the company highlighted both future innovation in artificial intelligence and how it can help drive growth from both a marketing and monetization perspective.

In terms of innovation, Adobe is turning to video. Discussed his new Firefly video designs. The company recently previewed the upcoming offering, which will include features such as text-to-video, the ability to remove objects from scenes, and smooth jump-cut transitions.

In terms of monetization, Adobe currently uses a credit model and said it is seeing an increase in total credits consumed. However, it also said it is monitoring how the generative credit economy evolves and is looking at alternative options, such as offering AI premium subscription plans. A better monetization strategy should help drive the company’s growth.

At the same time, it’s leaning towards marketing around artificial intelligence, particularly around its Express products, which are aimed more at individuals and non-creative professionals to help them make things like social media posts and flyers more visually stunning. of visual sight. This is a good new potential growth area for the company.

From a valuation perspective, Adobe currently trades at a forward price-to-earnings (P/E) ratio of 26 next year analyst estimates and a price-to-sales (P/S) multiple of 10. That’s quite a valuation fair for a software-as-a-service (SaaS) company growing its revenue in the low double digits.

ADBE PE report data (1 year ago) by YCharts.

While investors may have been disappointed by Adobe’s new Q4 ARR guidance, the shift to Cyber ​​Monday, which falls in the first quarter of fiscal 2025, could certainly play a role as the company’s products attract a lot of enthusiasts and individual creators. I wouldn’t worry too much about this number and focus more on new innovations and a better AI monetization strategy. I think they can increase the stock.

I think investors can take advantage of the recent price drop and buy this AI winner.