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Adobe (ADBE) has long been a trailblazer in the software industry, revolutionizing creative workflows with its cutting-edge design tools and setting the standard by pioneering the subscription model in 2012, well before it became an industry norm. But in 2024, the company’s dominance is being put to the test as a tidal wave of generative artificial intelligence (AI) competition shakes up the industry. Once the undisputed leader, Adobe now faces pressure to defend its crown.
The company has rolled out a suite of AI-driven tools under its Firefly brand, offering generative capabilities, including for images, text effects, and video. Tech giants like Google (GOOGL) and startups such as Stability AI, Midjourney, and Runway are also establishing their lead in this space.
And to make matters more challenging for Adobe, ChatGPT maker OpenAI recently upped its game by launching the much-awaited cutting-edge text-to-video AI bot, Sora. Adobe appears to be playing catch-up in a highly competitive field, leaving some investors questioning its ability to outpace rivals. Adding fuel to the fire, Adobe’s latest earnings left investors underwhelmed, igniting fresh concerns about its future.
Apart from its lukewarm guidance, Wall Street has been quick to point out another glaring issue. Analysts argue that Adobe’s management has failed to communicate a clear roadmap for monetizing the company’s AI innovations, leaving investors in the dark. This lack of clarity is fueling doubt and further chipping away at investors’ confidence. As the competition heats up and concerns over its AI strategy linger, would it be wise to buy, sell, or hold Adobe?
About Adobe Stock
San Jose-based Adobe is a global leader in software innovation. Renowned for flagship products like Photoshop and Illustrator, Adobe has supercharged its offerings with cutting-edge AI capabilities, transforming the way users design and innovate.
Presently valued at a market capitalization of around $203.2 billion, shares of this software giant have struggled to keep pace with the broader market, sinking roughly 23% over the past year and 23.7% on a YTD basis, massively underperforming the S&P 500 Index’s ($SPX) gains during both time frames.
From a valuation perspective, ADBE stock is priced at 28.9 times forward earnings and 9.53 times sales, well below its own five-year averages of 35.14x and 14.14x, respectively.
Adobe Crashes After Q4 Earnings Release
The software giant reported results for the final quarter of fiscal 2024 on Dec. 11, which was slightly better than forecast. Adobe’s Q4 revenue of $5.6 billion climbed 11.1% year-over-year and surpassed Wall Street’s projected figure of $5.5 billion. On an adjusted basis, the company’s earnings of $4.81 per share grew 12.7% annually, beating consensus estimates by roughly 3%.
Breaking down performance by segment, Adobe’s Digital Media division, the company’s largest business unit, posted $4.2 billion in revenue, up 12% from the previous year. Document Cloud also delivered strong results, generating $843 million in revenue, reflecting a 17% year-over-year growth. Meanwhile, the Digital Experience segment brought in $1.4 billion, marking a solid 10% increase from last year.
Adobe closed the quarter with record cash flows from operations of $2.9 billion, highlighting its strong financial position. The company also saw its remaining performance obligations (RPO) soar to an impressive $19.96 billion, underscoring a solid future revenue stream.
However, despite beating Wall Street’s projected top and bottom-line figures alongside demonstrating strong growth across its key segments, shares of Adobe tumbled more than 13% on Dec. 12. The sharp drop was driven by the company's guidance falling short of analyst projections, leading to a wave of investor concern and overshadowing its otherwise solid quarterly results.
For fiscal 2025 Q1, management projected revenue to range between $5.63 billion and $5.68 billion, slightly missing the consensus estimate of $5.72 billion. Looking forward to fiscal 2025, management anticipates revenue to land between $23.3 billion and $23.6 billion, which falls short of Wall Street’s $23.8 billion forecast, further fueling concerns among investors.
What Do Analysts Expect for Adobe Stock?
After Adobe’s underwhelming guidance in its Q4 earnings release triggered a negative market reaction, several Wall Street analysts came to the stock’s defense, offering optimistic outlooks. For instance, Mizuho analysts, while acknowledging that Adobe’s stock had been "frustrating" throughout fiscal 2024, maintained an "Outperform" rating, albeit lowering their price target to $620 from $640.
Similarly, Bank of America’s Brad Sills cut his price target for Adobe to $605 from $640 but kept a “Buy” rating on the stock. The analyst described fiscal 2024 as "a year of delayed gratification for AI." He highlighted Adobe’s progress in monetizing its impressive array of generative offerings. While competitive pressures from large language models such as Canva and Figma can potentially limit Adobe’s growth, Sills believes that replacement isn’t occurring.
He further added that "Engagement metrics like 4 billion Firefly images in Q4 are promising and likely to lead to some reacceleration as we move through the year from better upsell and cross-sell." Meanwhile, JMP Securities' Patrick Walravens also remained optimistic while maintaining a neutral stance despite acknowledging that Adobe faces “intense pressure” from rapid innovation in the AI space, particularly from OpenAI.
Despite the company’s struggles in a competitive landscape, Wall Street remains largely optimistic about ADBE stock, maintaining a consensus rating of “Moderate Buy” overall. Of the 32 analysts offering recommendations, 22 advise a “Strong Buy,” one suggests a “Moderate Buy,” seven advocate a “Hold,” and only two analysts maintain a “Strong Sell.”
The average analyst price target of $584.76 indicates 28% potential upside from the current price levels. However, the Street-high price target of $700 suggests that ADBE could rally as much as 53% from here. To that end, the stock remains a solid pick for long-term growth. Thus, investors who can weather the current volatility may find attractive upside in Adobe shares, particularly as the company works to monetize its AI-driven innovations.
