Despite posting record sales to close out the fiscal year ending Nov. 29, shares fell Adobe (NASDAQ: ADBE) fell as investors were disappointed with the company’s guidance. Adobe is at the forefront of generative artificial intelligence (AI) with both its Creative Cloud product suite, including Photoshop, and its Document Cloud business with Acrobat. However, AI monetization strategy is a bit behind the curve.
With the latest dip, the stock is now down about 18% at the time of writing. Let’s take a closer look at the results to see if this is a buying opportunity for investors heading into 2025.
Adobe ended the fiscal year with solid growth, with revenue up 11% to $5.61 billion. That was well ahead of previous expectations that called for revenue between $5.5 billion and $5.55 billion. Adjusted earnings per share (EPS), meanwhile, rose nearly 13% to $4.81, ahead of forecasts of $4.63 to $4.68.
Among individual segments, Digital Media, which houses both the Creative and Document Cloud businesses, saw revenue increase 12% to $4.15 billion. Within the segment, Document Cloud led the way with a 17% increase in revenue to $843 million. The larger Creative business saw revenue increase 10% to $3.30 billion.
The company generated $578 million in new annualized recurring revenue (ARR) for digital media, and ended the quarter with digital media ARR of $17.33 billion. That was just 2% growth from the $569 million in new digital media ARR it generated last year.
Adobe continued to hype its AI tools, saying that the generations of AI images from its Firefly AI model continue to accelerate and have now surpassed 16 billion cumulative generations. The company recently launched its Firefly video model in beta and said there was huge interest in it, and it should be more widely available in early 2025.
Adobe’s Digital Experience segment, which deals with digital analytics and online marketing, saw revenue increase 10% to $1.4 billion, while digital experience subscription revenue rose 13% to $1.27 billion. The company said it is seeing strong demand for its new Adobe GenStudio for Performance Marketing.
While the quarter itself was solid, Adobe disappointed investors. For fiscal 2025, the company expected revenue of between $23.30 billion and $23.55 billion, representing growth of between 8% and 9%. That was lower than the analyst consensus, as compiled by LSEG, which was for revenue of $23.78 billion. It led to adjusted earnings per share between $20.20 and $20.50.
For the fiscal first quarter, the company targeted revenue of $5.63 billion to $5.68 billion, up from $5.18 billion a year ago and growing 9% to 10%. That was less than the analyst consensus of $5.73 billion. It’s looking for adjusted earnings per share between $4.95 and $5.
Below is a chart showing the company’s expectations for the first quarter and the full year.
|
Metric |
Fiscal Q1 forecast |
Forecast for the 2025 budget year |
|---|---|---|
|
Gain |
$5.63 billion to $5.68 billion |
$23.30 billion to $23.55 billion |
|
Revenue from the Digital Media segment |
$4.17 billion to $4.20 billion |
$17.25 billion to $17.4 billion |
|
Revenue from the Digital Experience segment |
$1.38 billion to $1.40 billion |
$5.8 billion to $5.9 billion |
|
Adjusted earnings per share |
$4.95 to $5.00 |
$20.20 to $20.50 |
Data source: Adobe earnings publications.
Adobe’s stock has underperformed this year, and for all of Adobe’s talk about AI innovation, that innovation hasn’t translated into accelerated revenue growth. Creative Cloud, the largest company, saw new ARR rise just 2% this quarter, while it expects slowing revenue growth through 2025.
The company is currently trying to find a balance between attracting new AI users and generating revenue from AI. That is currently leading to solid growth, but has not increased revenue growth, which investors want to see. And while Adobe likely issued somewhat conservative expectations that it can beat, it gave no indication that revenue growth could accelerate next year.
Adobe has adopted a credit model for using generative AI, and the biggest AI opportunity may be to abandon this model. During the call, the company said it has the ability to create more levels in its creative products, and that this will likely be the better way to monetize its AI efforts.
From a valuation perspective, the stock currently trades at a price-to-earnings (P/E) ratio of 23.5 times analyst estimates for fiscal 2025 and a price-to-earnings (P/S) ratio of less than 9. That seems like a relatively attractive valuation.
While I think Adobe still has a lot to prove, I like its product innovation roadmap, with things like Firefly video. More importantly, I think it can find a better monetization model through tiered plans. For this reason, I think investors may want to consider buying the dip in the stock.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Adobe. The Motley Fool has a disclosure policy.
Adobe shares fall despite record sales. Should Investors Buy the Stock on the Dip? was originally published by The Motley Fool
