Adobe (ADBE), a dominant player in the Portable Document Format (PDF) technology, has faced a challenging year due to macroeconomic headwinds and competition. The company’s stock price has plummeted by 12.4% year-to-date, lagging behind the Zacks Computer-Software industry, the broader technology sector, and the S&P 500 index. This downturn has raised concerns about Adobe’s future prospects. However, amidst these challenges, Adobe’s commitment to generative artificial intelligence (GenAI) is emerging as a potential driving force for a much-needed recovery.
Adobe’s robust cloud-enabled products and expanding GenAI capabilities are strengthening its position in the digital content and marketing industry. Its family of creative GenAI models, known as Firefly, is gaining momentum. The company’s recent unveiling of the Firefly Image 2 Model, Firefly Vector Model, and Firefly Design Model represents a significant advancement in its creative GenAI capabilities, enhancing creative control, image quality, and illustration capabilities. The introduction of the Firefly Video model further bolsters Adobe’s GenAI portfolio. Since the launch of Firefly, Adobe has achieved over 12 billion generations, showcasing the significant impact of these innovations.
Adobe is actively expanding its GenAI capabilities across its product suite. The company has enhanced the Acrobat AI Assistant, enabling users to ask questions, gain insights, and create content from a variety of documents. It has also introduced enhanced meeting transcript capabilities within the AI Assistant. Adobe is further integrating Firefly image generation into its Edit PDF workflows, optimizing the AI Assistant to generate content suitable for presentations, emails, and other communication formats. Adobe Express Platform AI Assistant is another key initiative, offering capabilities like answering technical questions, automating tasks, simulating outcomes, and generating audiences. The launch of Generative Remove in Adobe Lightroom, a powerful tool backed by Firefly, enables users to remove unwanted objects from photos with a single click. Adobe Express for Enterprise, powered by Firefly Image Model 3, is driving momentum among businesses.
Adobe’s differentiated approach to AI is attracting a diverse customer base across its segments. Notable customers include International Business Machines (IBM), Johnson & Johnson, Mayo Clinic, Home Depot, Dentsu, TD Bank, Newell Brands, Alphabet’s Google, MediaMonks, Meta, U.S. Navy, PepsiCo, Estee Lauder, Disney, RedBull, Amazon, KPMG, U.S. Treasury Department, and Charles Schwab. This impressive customer base reflects the value that Adobe’s GenAI solutions bring to organizations.
The strong customer momentum and the positive trajectory of Firefly are expected to contribute to both near-term and long-term growth for Adobe. For the fourth quarter of fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. The Zacks Consensus Estimate for the same period is $5.54 billion, representing year-over-year growth of 9.8%. Management expects non-GAAP earnings per share between $4.63 and $4.68, while the consensus mark stands at $4.66, indicating year-over-year growth of 9.1%. The estimate has been revised upwards over the past 30 days. For fiscal 2024, the Zacks Consensus Estimate for revenues is $21.44 billion, indicating year-over-year growth of 10.5%. The consensus mark for fiscal 2024 earnings is pegged at $18.26 per share, suggesting year-over-year growth of 13.6%. The estimate has been revised upwards in the past 30 days.
While Adobe’s GenAI strategy presents a compelling opportunity, the company faces certain challenges. The challenging macroeconomic environment, characterized by high oil prices, elevated interest rates, and fears of a looming U.S. recession, pose risks. The ongoing Russia-Ukraine war also presents uncertainties for the company’s business. Additionally, Adobe faces stiff competition from tech giants and well-funded startups in the AI software space, such as Stability AI and Midjourney. This intensified competition might delay the realization of returns from Adobe’s AI investments.
Adobe’s stock valuation is currently considered stretched. The forward 12-month Price/Sales ratio for Adobe is 9.92X, exceeding the industry average of 7.84X. This suggests that the stock may be overvalued at present.
In conclusion, Adobe’s deepening focus on GenAI and its innovative GenAI-powered portfolio offer a promising opportunity for long-term investors. The upward revisions to earnings estimates further support this positive outlook. However, macroeconomic uncertainties and intense AI competition present challenges. The stock’s stretched valuation also makes it a risky bet at this time. Adobe currently holds a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point before investing.
