HomeStock MarketADBE 2024 and Beyond Outlook: Overcoming Short-Term AI Hurdles for Long-Term Success

ADBE 2024 and Beyond Outlook: Overcoming Short-Term AI Hurdles for Long-Term Success

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Adobe Inc. (ADBE), widely known for its multimedia and creativity software for content creation, photo, and video editing, recently reported financial results for the first quarter of fiscal year 2024, which ended on March 1, 2024. It posted revenue of $5.15 billion, beating analysts’ estimate of $5.15 billion. This compared to revenue of $4.66 billion in the previous year’s quarter.

Adobe achieved record revenue in the first quarter, showcasing solid momentum across its business segments. Digital Media segment revenue was $3.82 billion, up 12% year-over-year. Creative revenue increased to $3.07 billion, representing 11% year-over-year growth, and Document Cloud revenue came in at $750 million, representing 18% year-over-year growth.

Moreover, ADBE’s Net new Digital Media Annualized Recurring Revenue (ARR) was $432 million, exiting the quarter with a Digital Media ARR of $15.76 billion. Creative ARR increased to $12.78 billion, and Document Cloud ARR rose to $2.98 billion. Also, revenue from the Digital Experience segment was $1.29 billion, an increase of 10% from the same period last year.

Furthermore, the company’s non-GAAP operating income grew 15.8% from the year-ago value to $2.47 billion. Its non-GAAP net income rose 17.2% year-over-year to $2.05 billion. Also, Adobe reported non-GAAP net income per share of $4.48, compared to the consensus estimate of $4.38, and up 17.9% year-over-year.

Adobe’s cash flows from operations came in at $1.17 billion for the quarter. In addition, its enterprise strength drove the growth of Remaining Performance Obligations (RPO) by 16% year-over-year.

 

 

Adobe’s remarkable first-quarter results and record RPO demonstrate robust uptake of its innovative products and services by customers. As a result of its solid trajectory of growth and profitability, the company declared a new share buyback program worth $25 billion. It underscores ADBE’s ongoing commitment to returning capital to its shareholders.

Bleak Second Quarter 2024 Guidance

While its first-quarter results beat estimates, Adobe presented a weak outlook for the second quarter of fiscal 2024 and opted not to update on full-year expectations. For the current quarter, ADBE anticipates total revenue ranging from $5.25 to $5.30 billion. The company expects a new Digital Media net new ARR of approximately $440 million, and Digital Media segment revenue is projected between $3.87 billion and $3.90 billion.

ADBE projects Digital Experience segment revenue and Digital Experience subscription revenue of $1.31-$1.33 billion and $1.165-$1.185 billion, respectively. The company also foresees non-GAAP EPS reaching between $4.35 and $4.40.

Challenges and Opportunities in the AI Landscape

ADBE has undergone a remarkable metamorphosis in the last decade, converting its desktop-based software such as Photoshop, Premiere Pro, Illustrator and Acrobat into cloud-based services. The company further enriched this ecosystem by incorporating an array of marketing, e-commerce, and even analytics services.

The Digital Media segment, encompassing Creative Cloud and Document Cloud, however, grappled with macro and micro challenges specific to the media industry. It faced currency headwinds and enhanced competitive pressure from Figma in the software User Interface (UI) market.

ADBE’s disappointing failure to acquire Figma for its potential was substantial. The Creative Cloud, in near-term scenarios, could have seen boosted revenue, and a significant competitor would have been eliminated. Contrarily, ADBE found itself paying a hefty $1 billion termination fee directly to Figma upon antitrust regulators thwarting the deal.

In an effort to counterbalance the aforementioned loss, the company is vigorously expanding its generative AI platform, Firefly. With Firefly’s assistance, designers can generate photos, videos and 3D models using minimal text-based prompts. Furthermore, it accelerates various tasks throughout both Digital Media and Digital Experience ecosystems.

Over the past year, Firefly popularized ADBE as a stock in the AI buying frenzy. However, it has yet to increase its digital media sales significantly. Exacerbating matters, ADBE still grapples with another probe from the Federal Trade Commission (FTC) in relation to its subscription cancellation policies.

During the fiscal year 2023, several macro headwinds impacted the company’s smaller Digital Experience segment, which is responsible for managing its other enterprise-facing cloud services. Additionally, currency headwinds hindered a percentage point of this segment’s revenue growth.

CEO Perspective and Strategic Focus

Adobe is making noticeable progress across existing products and mobile tools and even introducing new innovative product offerings. An example is AI-powered Enhance Speech, an innovative tool that automatically dubs a video into a language selected by the user. It is an impressive addition to ADBE’s expanding suite of products and services.

Also, ADBE recently launched an AI assistant in its Reader and Acrobat applications that can produce summaries of and answer questions about PDF documents.

The company has clarified its focus on acquiring an extensive user base. The concept underpinning this strategy is that robust customer acquisition and retention will enable ADBE to monetize its users over time progressively. As a pioneer in the software-as-a-service (SaaS) business model, ADBE maintains fidelity by incorporating AI with traditional methodologies.

Working actively, ADBE is embedding generative AI across its entire product portfolio. It has already introduced this capability in Photoshop and Illustrator. Moreover, demonstrating a commitment to innovation, it plans to release a text-to-video creation product by the end of the year. Concurrently, the company has previewed an upcoming music generator product.

Chief Financial Officer Dan Durn mentioned that numerous projects are slated for release in the forthcoming months. Further, he emphasized that ADBE has merely initiated the process of capitalizing on its generative AI technology.

Moreover, a crucial aspect of the company’s latest earnings call highlighted Adobe CEO Shantanu Narayen’s discussion on differentiating between experimentation and monetization within its platforms. Adobe is still in the process of determining which features and tools will resonate with users. Adobe needs to avoid investing billions in tools that either go unused by users or don’t justify future price increases.

The main challenge for Adobe lies in profit generation from AI. As a subscription-based company, Adobe must increase its customer base and revenue per user to support rising capital expenditures. This challenge is akin to what platforms like Netflix, Inc. (NFLX) face, where they must enhance their services’ value through quality content to justify price hikes.

During Adobe’s latest earnings call, a shift in momentum was noted, along with the recognition that while new AI-powered applications have significant growth potential, this doesn’t guarantee an immediate impact on its short-term results.

Analysts’ Changes to Price Targets

Stephen Bersey, an analyst at HSBC, has cited concerns over AI and noted disappointing guidance. Consequently, he reduced ADBE’s firm price target from $557 to $511, a decision aligned with his unchanged hold rating on the shares. The investment company perceives ADBE’s competitive moat as being potentially threatened by AI.

Reportedly, some employees of the company also grapple with the threat of AI. In July, news emerged that a significant number of ADBE’s workforce perceived AI as an “existential crisis” for numerous designers.

Barclays reduced its price target for ADBE’s shares from $700 to $600 and maintained an overweight rating for the stock. Analysts stated that they anticipate the stock will recover and “would be buying this dip because pricing is masking the underlying strength in Creative Cloud.”

Further, JP Morgan cut the price target on ADBE from $600 to $570, maintaining a Neutral rating. Baird also slashed the price target on ADBE stock from $590 to $525, and its analyst Rob Oliver maintained a Neutral rating on the stock. Meanwhile, UBS analyst Karl Keirstead reiterated his Neutral rating on the stock and cut the price target from $600 to $540.

On the contrary, Brad Zelnick, an analyst at Deutsche Bank, reiterated his Buy rating on ADBE stock and set a price target of 650. He asserts that the emergence of competitive generative AI tools for images and video will benefit ADBE. As per Zelnick, creators will continue to require editing tools for these images and videos; hence, their indispensability remains intact.

Moreover, Mizuho Securities analyst Gregg Moskowitz predicts a second-half-yearly commencement for the company to profit from new product introductions and the growth in generative AI. With a price target set at 680, he maintained his Buy rating on ADBE stock.

Bottom Line

ADBE reported better-than-expected results for the first quarter of the fiscal year 2024; however, it issued weak guidance for the second quarter. The design software company expects earnings growth of 12% year-over-year and sales increase of 10%. That would be its third straight quarter of declining earnings growth and second consecutive quarter of slowing sales.

Investors and analysts are wondering when Adobe will see a boost from its innovations in generative AI. Some analysts raised concerns about the health of its Creative Cloud business and the pace of AI monetization. Also, the company is assumed to face a growth problem caused by a challenging macroeconomic climate and fierce competition from Figma, Canva, and other forms, among other factors.

Although Adobe’s new AI-powered product offerings have substantial long-term potential, it’s important to note that their impact on short-term results may not be immediate.

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