Adobe Stock Drops After Failing to Clear a High AI Bar

Adobe (NASDAQ:ADBE) shares fell on Thursday after the software developer forecast adjusted profit for the first fiscal quarter below the average analyst estimate. The company’s Q4 results were solid as AI transformation continues to play into Adobe’s hands.

Solid Results and a Conservative Outlook

Adobe said it earned $4.27 per share, topping the expected $4.14 and almost 20% higher than last year’s profit per share of $3.60. Adjusted operating income rose 16% year-over-year to $2.34 billion.

Revenue jumped by 12% YoY to $5.05 billion, just ahead of the expected $5.02 billion. Subscription revenue was up 13% YoY while Product revenue fell nearly 1% to $114 million. The company generated a further $171 million from its Services business, down almost 4% YoY.

"Adobe's remarkable performance in FY23 drove world-class margins and operating cash flows of $7.30 billion. Adobe’s strategy, scale, speed of execution and profitability position the company for years of sustained success," said Dan Durn, executive vice president and CFO, Adobe.

For the full 2023 year, Adobe generated record revenue of $19.41 billion with the company attributing this success to the “strong momentum across Creative Cloud, Document Cloud and Experience Cloud."

Adobe's Digital Media saw its revenue reach $3.72 billion, marking a 13% YoY growth. Creative revenue contributed significantly, reaching $3 billion, reflecting a 12% YoY growth. The net new Digital Media Annualized Recurring Revenue (ARR) stood at $569 million, culminating in a quarter-end Digital Media ARR of $15.17 billion. Within this, Creative ARR expanded to $12.37 billion, while Document Cloud ARR grew to $2.81 billion.

For this quarter, Adobe said it sees adjusted EPS in the range of $4.35 and $4.40, above the Street at $4.27. Total revenue is expected between $5.1 billion and $5.15 billion, below the expected $5.19 billion.

Similarly, Adobe offered a conservative full-year outlook despite the apparent AI optimism. The company expects to record an adjusted EPS of $17.80, up or down 20 cents, which is below the expected $18.00.

Full-year revenue is seen in the range of $21.3-21.5 billion, while analysts were looking for $21.73 billion. Moreover, Adobe said it sees a new net ARR for FY24 at $1.9 billion while the Street was looking for $2.02 billion. These two outlook segments are likely the key reasons why Adobe stock is trading heavy on Thursday.

Figma Deal Updates

Adobe addressed EU antitrust charges regarding its proposed $20 billion acquisition of Figma, a cloud-based designer platform, at a closed hearing last week. The European Commission recently warned that the deal might reduce competition in the global market for interactive product design software, where Figma competes with Adobe.

More precisely, the concern is that the acquisition could eliminate Figma as a competitor in vector and raster editing tools, reinforcing Adobe's dominance. The EU antitrust decision on the deal is expected by Feb. 5.

The acquisition has also raised concerns in the UK, with the competition agency suggesting potential harm to innovation for software used by the majority of UK digital designers. Adobe recently accused the UK’s Competition and Markets Authority (CMA) of taking too long to make a decision.

“I think we can all agree that expediting these kinds of decisions is important for innovation and for doing the right thing by consumers and customers to make these decisions faster and move more quickly,” David Wadhwani, the president of Adobe’s digital media division, told The Times.

The regulator highlighted that the digital design sector holds substantial economic importance for the UK, contributing nearly £60 billion, which accounts for 2.7% of the national economy. This sector provides employment for over 850,000 individuals engaged in highly skilled work, it added.

“The software this sector uses is pivotal to its success, so the CMA has from the outset been very focused on ensuring this merger doesn’t adversely affect such an important part of the UK economy,” said Margot Daly, chair of the independent group conducting this investigation.

CMA is set to decide on the deal by February 25, 2024.

A Key AI Beneficiary

Shortly after reporting FQ3 results, Adobe showcased its focus on new AI innovation during its Analyst Day. The company emphasized the strong initial adoption and top-of-funnel creation of its GenAI solutions.

While monetization is anticipated to be a theme in 2024, Adobe aims to expand its monthly active users (MAUs) from hundreds of millions to billions by embracing GenAI technology and targeting over 5 billion web-connected users.

Despite a YTD increase of approximately 80% in ADBE shares and rising expectations, investors are likely to continue to see upside momentum in the stock, particularly with the ramp-up of Firefly.

Adobe's Firefly features a new generation AI vector image model, which is seen by some as the most significant innovation years for Illustrator.

The management’s commentary indicates that users are recognizing the enhanced productivity and quality and have expressed a willingness to pay more for this Adobe software.

The positive response is particularly evident among professionals who are open to paying extra for extended usage of GenAI products beyond monthly limits, emphasizing the perceived value and impact of Adobe's cutting-edge AI technology on their work.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.