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Artificial intelligence (AI) has evolved beyond mere jargon to become a game-changer. From Apple’s (AAPL) recent foray into the AI arena to generative AI’s growing impact across software development, automotive, healthcare, and finance, the technology is reshaping how industries innovate and operate.
Software company Adobe Inc. (ADBE) has embraced this transformative technology, integrating genAI across its Creative Cloud, Document Cloud, and Experience Cloud platforms to enhance creativity, automate workflows, and drive efficiencies.
Recognizing Adobe’s genAI potential, brokerage firm Deutsche Bank (DB) named the software stock to its Q3 “Fresh Money” list as a top pick. Analyst Brad Zelnick predicts new 52-week highs for ADBE as the company continues to monetize genAI and expand its product range. For investors eyeing growth opportunities in the niche, here’s why ADBE stock could be a compelling choice.
About Adobe Stock
San Jose-based Adobe Inc. (ADBE), founded in 1982, is a powerhouse in creativity and multimedia software. Known for its core products like Creative Suite, Document Cloud, and Digital Marketing Solutions, Adobe has now infused these tools with cutting-edge AI features. The company boasts a market cap of $250.3 billion, cementing its status as a leader in the tech world.
Adobe’s groundbreaking generative AI, powered by Adobe Sensei, transforms digital experiences. With tools like GenStudio and the AI Assistant, creativity and productivity are supercharged. These innovations automate content creation, simplify workflows in Photoshop and Acrobat, and streamline tasks for users.
Adobe stock has rallied 13.7% over the past 52 weeks, though the shares are down 5.4% in 2024. The stock is working to close its YTD deficit, though, with ADBE soaring about 24% in the month of June alone - including a 14.5% leap on Friday, June 14, after its Q2 earnings release.
ADBE is currently priced at 31.09x forward earnings and 13.21x sales, both of which are a slight discount to its 5-year historical average multiples.
Adobe Beats Q2 Earnings Estimates
On June 13, Adobe reported its fiscal Q2 earnings results - which not only topped Wall Street’s forecasts on both the top and bottom lines, but also surged past its own internal projections. Revenue of $5.3 billion rose 10.2% year over year, while non-GAAP EPS of $4.48 jumped 14.6% annually.
Digital Media segment revenue grew 11% annually to $3.9 billion, with Creative revenue hitting $3.1 billion, up 10%, and Document Cloud revenue rising 19% to $782 million. Net new Digital Media ARR totaled $487 million, ending the quarter with Digital Media ARR at $16.25 billion, including $13.1 billion for Creative ARR and $3.15 billion for Document Cloud ARR. Digital Experience segment revenue surged 9% to $1.3 billion, while Digital Experience subscription revenue rose 13% to $1.2 billion.
GenAI Revolutionizes Adobe’s Product Landscape
Adobe’s strategic integration of AI into its products has been a key driver of its recent success. The company’s generative AI model, Firefly, launched in March 2023, has revolutionized creativity across Adobe’s platforms, generating over 9 billion images. Beyond Creative Cloud, Firefly enhances Document Cloud and other applications, driving user upgrades and demonstrating Adobe’s AI-driven innovation and early monetization strategy.
Adobe has also leveraged genAI tech beyond Firefly across its product portfolio. The company introduced Adobe Express as an AI-first application, revolutionizing web and mobile experiences. In March, it released the new Adobe Express mobile app for Android and iOS in beta with Adobe Firefly GenAI and new mobile editing capabilities, enabling faster creation of standout content directly from creative ideas.
In Document Cloud, the Acrobat AI Assistant enhances document productivity by summarizing, extracting insights, and composing presentations from PDFs. Additionally, Adobe Experience Platform (AEP) AI Assistant boosts marketing productivity through generative AI.
In the Q2 earnings call, Adobe’s President of Digital Experience, Anil Chakravarthy, highlighted AEP’s trajectory to a billion-dollar business with native apps. Adobe's AI integration across Creative Cloud, Document Cloud, and Experience Cloud enhances customer value and operational efficiency.
For Q3, management is eyeing total revenue between $5.33 billion and $5.38 billion, with the Digital Media segment projected at $3.95 billion to $3.98 billion, and non-GAAP EPS landing between $4.50 and $4.55. Looking ahead to fiscal 2024, they are projecting revenue between $21.4 billion and $21.5 billion, with Digital Media segment revenue expected to range between $15.80 billion and $15.85 billion. Non-GAAP EPS is anticipated to be between $18 and $18.20.
Analysts tracking Adobe expect the company’s GAAP profit to reach $14.69 per share in fiscal 2024, up 14.8% year over year, and grow another 13.3% to $16.64 per share in fiscal 2025.
What Do Analysts Expect for Adobe Stock?
Last week, Deutsche Bank revamped its “Fresh Money” list for Q3, featuring Adobe among its top analyst picks. Analyst Brad Zelnick highlighted Adobe’s successful monetization of genAI, a factor that initially raised doubts earlier in the year.
In particular, Zelnick called out the strong adoption of Creative Cloud with premium AI features among enterprise clients, and the improved conversion of free users to paid services. Zelnick sees Adobe as strategically positioned in an AI-driven world, particularly with its Firefly AI, which he believes can expand the company’s total addressable market by simplifying and accelerating content creation. He wrote, “Adobe looks well-positioned to carry its momentum into” the second half.
Zelnick has a “Buy” rating on ADBE stock with a $650 target price, implying expectations for the shares to hit new 52-week highs.
Overall, Adobe stock has a consensus “Moderate Buy” rating. Out of the 31 analysts covering the stock, 22 recommend a “Strong Buy,” one advises a “Moderate Buy,” six suggest a “Hold,” and the remaining two give a “Strong Sell” rating.
The mean price target of $612.60 suggests an upside potential of just 8.5% from the current price levels. The Street-high target price of $730 for Adobe implies the stock could rally as much as 29.3%.
On the date of publication, Sristi Suman Jayaswal did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
