Adobe Shares Drop Amid Investor Concerns Over AI Cash Potential

Adobe Inc. shares saw their sharpest decline in six months after the company issued an underwhelming financial outlook, causing frustration among investors eager for tangible returns from Adobe’s new artificial intelligence tools. Known for its popular creative software, Adobe has been integrating AI technology, particularly its Firefly platform, into applications like Photoshop and Illustrator. While this AI innovation is generating excitement, investors are growing impatient to see these tools translate into significant revenue, especially with smaller startups and competitors like Canva, Salesforce, and Workday threatening its market share.

Adobe Shares Drop 9% on Weak Q4 Guidance Despite Q3 Beat$ADBE

– Adobe’s Q3 revenue of $5… More 👇https://t.co/Mpv67IyUTJ

— Wall Street NOW (@WallStreet_NOW_) September 13, 2024

Adobe’s fiscal fourth-quarter guidance fell short of Wall Street’s expectations, exacerbating concerns. A key metric, the digital media net new annual recurring revenue, which tracks the growth of Adobe’s creative software business, is forecasted to be $550 million, below the $561.1 million average estimate by analysts. Total revenue for the quarter is expected to reach $5.55 billion, just shy of the $5.6 billion predicted by the market.

The stock reacted swiftly to this news, dropping as much as 10% on Friday to $526.60, its lowest level since mid-March. So far in 2024, Adobe shares have declined about 11%.

David Wadhwani, Adobe’s head of digital media, told analysts that the company remains focused on encouraging customer usage of its AI innovations rather than directly monetizing them at this stage. CEO Shantanu Narayen added that Adobe is working on incorporating AI into its 3D and video-editing tools, with video content expected to provide new avenues for revenue generation.

However, according to Wells Fargo analyst Michael Turrin, investors were hoping to see more immediate financial benefits from AI in the second half of Adobe’s fiscal year. The lower-than-expected guidance for the fourth quarter only intensified their concerns.

One silver lining for Adobe is the price hikes it implemented last year, which have helped offset some of the investment in AI development. Rival Canva, known as Adobe’s most significant competitor, has also recently raised prices for business users after introducing new AI features.

$ADBE Adobe Q3 FY24 Earnings:

EPS: $4.65 vs $4.54 est. ✅
Revenue: $5.41B vs $5.37B est. ✅

Guidance Q4 FY24:
EPS: $4.63-$4.68 vs $4.67 est. ❌
Revenue: $5.50B-$5.55B vs $5.60B est. ❌

Shares are down -7.9% after-hours. 📉 pic.twitter.com/uIoRG1Hy8Y

— The Future Investors (@ftr_investors) September 12, 2024

In its third quarter, Adobe reported a solid performance, with sales growing 11% to $5.41 billion and earnings per share of $4.65, surpassing analyst predictions. The company’s document-processing software, which outpaced expectations by adding $163 million in new annually recurring business, proved to be a standout. However, Adobe’s photo and video-editing products—where it has integrated proprietary AI models—failed to deliver the same level of outperformance, contributing to investor anxiety.

Despite Adobe’s progress in AI, the contrast between the success of its document-processing tools and its creative software products underscores the challenges the company faces in reassuring investors about the long-term profitability of its AI initiatives.

Key Points:

i. Adobe shares dropped 10% after issuing a fiscal fourth-quarter outlook that disappointed investors eager for returns on its AI tools.

ii. The company’s forecasted digital media net new annual recurring revenue of $550 million fell below Wall Street’s $561.1 million estimate.

iii. Adobe has integrated its AI technology, Firefly, into creative tools like Photoshop, but investors are impatient for financial results.

iv. Adobe’s document-processing software outperformed expectations, while its AI-powered creative products underperformed, fueling concerns.

v. While Adobe’s CEO and executives remain focused on future AI revenue potential, particularly in video content, investors wanted more immediate gains.

Charles William III – Reprinted with permission of Whatfinger News