Adobe Stock Pops 15% As Customers Pay Up For Generative AI Services

Since peaking at $663 in November 2021, Adobe’s stock market value has fallen 21%. As an investor in the San Jose, Calif.-based software company, this lost value is not pleasant.

Ups and downs are likely for most stocks. If a company beats investor expectations and raises guidance, the stock rises. Otherwise investors dump the stock. After that, analysts lower their expectations.

If the company subsequently wins a larger share of a new, fast-growing market, the lower expectations could help investors. That’s because the company’s new growth trajectory can help it exceed diminished expectations and raise guidance. Such results can bring new life to the company’s stock price.

That is what Adobe did June 13 — when it reported revenue and profit that topped investor expectations. The company’s shares surged 15% — their biggest rally since March 2020, according to CNBC.

Can Adobe keep beating analysts’ forecasts and raising growth forecasts? If customers keep buying its generative AI-powered products that answer could be yes.

Adobe’s Expectations-Beating Performance and Prospects

Adobe’s second quarter report delivered the growth investors wanted. For the quarter-ending May 31, Adobe posted higher than anticipated revenue and earnings and predicted faster growth in the current quarter, according to the Wall Street Journal.

Here are the key figures:

• Fiscal year 2024 Q2 revenue: $5.31 billion — up 10% and $20 million ahead of analyst expectations according to FactSet.
• Fiscal year 2024 Q2 adjusted earnings per share: $4.48— 10 cents per share more than Wall Street expected, noted FactSet.
• Fiscal year 2024 revenue forecast: a range between $21.4 billion to $21.5 billion — the midpoint of which is $40 million above the company’s previous forecast, noted the Journal.
• Fiscal year 2024 adjusted earnings per share forecast: a range between $18 to $18.20 — the midpoint of which is 30 cents a share more than the company’s previous forecast and 10 cents a share more than the FactSet estimate.

Adobe’s record results were due to strong growth across the company’s Creative Cloud, Document Cloud and Experience Cloud and its progress with AI. “Our highly differentiated approach to AI and innovative product delivery are attracting an expanding universe of customers and providing more value to existing users,” CEO Shantanu Narayen said in a June 13 press release.

Will Generative AI Products Deliver Sustain A Recovery In Adobe’s Stock Price?

Adobe’s faster growth could be sustained due to the value the company’s AI-infused products provide to customers. Adobe’s stronger business results from “The way AI is actually making our applications both more affordable, easy to onboard, as well as frankly higher value uses,” Narayen told investors June 13. according to Quartz.

Customers are willing to pay for AI. “I am a big believer that generative AI is going to, for all the categories that we’re in, it’s actually going to dramatically expand the market because it’s going to make our products more accessible, more affordable, more productive, in terms of what we can do,” he added.

Two Adobe business lines are benefiting significantly from AI.

Creative Cloud — which encompasses Photoshop, Illustrator, Lightroom and Premiere products — grew rapidly.

Indeed Adobe’s Digital Media segment, which encompasses Creative Cloud subscriptions, grew 11% in the most recent quarter to $3.91 billion in revenue. Adobe has infused AI into many of these products by training Firefly — a collection of generative AI models — on more than nine billion proprietary images, according to Narayan.

“We expect that to continue to grow in Q3 and Q4,” he told investors. “I think the biggest opportunity for us and why we’re really excited about gen AI is in the interfaces, because that’s the way people derive value, whether it’s in being able to complete their tasks faster, whether it’s being able to do new workflows.”

Customers are paying higher prices for Firefly. “More people are moving to the higher-priced, higher-value plans because of the Firefly capabilities,” David Wadhwani Chief Business Officer, Digital Media at Adobe, told investors according to Adobe’s Q2 2024 earnings call transcript.

Chief marketing officers — notably at Adobe — are benefiting from AI. The company’s AI-infused services cut the cost of the marketing campaign, accelerate its time to market, and expand “the amount of content that we can create to personalize that campaign,” Wadhwani added.

Adobe’s Document Cloud — that supplies Reader and Acrobat — has boosted the value of PDFs to end users. Through Acrobat AI Assistant, available through an add-on subscription, consumers can pose natural language queries to “the trillions of PDFs which hold a significant portion of the world’s information,” Narayan said.

Adobe raised its forecasts for Digital Media and Digital Experience — the company’s digital marketing platform — whose revenue grew 9% to $1.33 billion in the latest quarter.

Specifically, Adobe expects Digital Media net new annual recurring revenue to reach $1.95 billion and Digital Experience subscription revenue to rise to about $4.8 billion, according to MarketWatch.

Will Adobe’s Stock Price Rise?

Adobe’s stock price could go up more. Based on 26 Wall Street analysts offering 12- month price targets, Adobe’s stock could rise about 16.7% to the average $613 per share, according to TipRanks.

Analysts expressed mixed views. JMP — whose analysts have a hold rating on the stock — are concerned about “a challenging economic environment and increased competition in design software.” Yet they were also impressed with “how Adobe is integrating AI functionality across its product portfolio,” CNBC reported.

By contrast, Piper Sandler raised revenue estimates slightly for 2024 and 2025 and rate the stock a buy. “Customer reactions to recent innovations were encouraging, as increasing availability of AI-powered solutions are expected to drive further user acquisition” and better average revenue per user, wrote the Piper Sandler analysts according to CNBC.

For software investors, Adobe proved itself to be an oasis of growth in a desert of disappointment. In late May, Salesforce stock fell hard after reporting “weaker-than-expected revenue and [issuing] disappointing guidance,” CNBC wrote. That same week, MongoDB, SentinelOne, UiPath and Veeva all slashed their forecasts for the current year, CNBC noted.

Another analyst suggested the big increase in Adobe’s stock was due in part to negative sentiment. “The huge pop in the shares in the after-market illustrates just how negative sentiment had become,” Evercore ISI’s Kirk Materne wrote in a report featured by MarketWatch.

“We believe that the outlook remains attractive on a risk/reward basis as adoption of [generative] AI services across Adobe’s platform continues to accelerate,” added Materne — who has a $650 target price for the company.

If the company keeps beating and raising, investors could benefit from selling shares in these declining software companies and buying Adobe stock.

Disclosure: I have owned Adobe shares since 2005 when the company acquired Macromedia.