Adobe’s (ADBE) AI Strategy Fuels Solid Results and Future Growth Opportunity

Stock (Symbol)

Adobe (ADBE)

Stock Price

$386

Sector

Data is as of

Expected to Report

Company Description

Adobe Inc. is a software company. It offers a line of products and services used by professionals, communicators, businesses, and consumers for creating, managing, delivering, measuring, optimizing, engaging and transacting with content and experiences across various digital media formats.

Its segments include Digital Media, Digital Experience and Publishing and Advertising.

The Digital Media segment provides products, services and solutions that enable individuals, teams and enterprises to create, publish and promote their content anywhere. Digital Media segment is centered around Adobe Creative Cloud and Adobe Document Cloud.

The Digital Experience segment provides an integrated platform and set of applications and services through Adobe Experience Cloud that enable brands and businesses to create, manage, execute, measure, monetize and optimize customer experiences.

The Publishing and Advertising segment consists of products and services that address diverse market opportunities. Source: Refinitiv

Sharek’s Take

Adobe’s software is making the Internet work from videos, images, movies, ecommerce to marketing. The company has two main segments: Digital Media and Digital Experience:

• Digital Media: Last qtr, revenue grew 11% year over year, accounted for 74% of total revenue.
  • Adobe’s Digital Media tools help people create, design, and share content easily. Popular apps like Photoshop, Illustrator, and Premier Pro let users make everything from photos to videos. Adobe Express and Acrobat make it simple to work on documents, even on the go. With AI feature like Firefly and Acrobat AI Assistant, creating and managing content is faster and smarter for everyone. This segment includes:
    • Creative Cloud: It is the gold standard for imaging design, video, and illustration abilities to tens of millions of people, including movie makers, content creators, and digital marketers.
    • Document Cloud: It provides editing, sharing, scanning, and collaborating with PDFs across desktops and mobile apps. Document Cloud has a Scan and Sign feature called Adobe Sign, that’s similar to Docusign.
• Digital Experience: Last qtr, revenue grew 10% year over year, accounted for 25% of total revenue.
  • Adobe’s Digital Experience tools help businesses create personalized customer journeys using data and AI. Products like Adobe Analytics, Experience Manager, and Marketo Engage help brands understand customers, deliver content, and run smart marketing campaigns. With AI tools like the Experience Platform AI Assistant, businesses can automate and improve their workflows. This segment includes:
    • Adobe Experience Cloud: for marketers to craft experiences to differentiate their brands and engage customers. Includes:
      • Marketo: marketing automation software for midium-sized businesses including software for online marketing, lead management, and email marketing.
      • Magento: a cloud eCommerce platform that allows business owners to make their websites easily.
    • Adobe Advertising Cloud: to manage advertising across TV and digital formats.
    • Adobe Analytics: real-time analytics and audience segmentation across all marketing channels.

• Publishing & Advertising: Last qtr, revenue was -5%, accounted for 1% of total revenue.
  • It is the 3rd division of Adobe and includes older products including eLearning, web conferencing, Adobe PDF printing tech, and the Print & Publishing, which helps magazine, newspaper, and book publishers design layouts, graphics, and illustrations.

I believe ADBE is a tech stock that’s suitable for conservative investors. The stock currently has a Estimated Long-Term Growth Rate of 13% per year, and a reasonable P/E of 19. Although Adobe doesn’t pay a dividend any longer, management does buy back stock. ADBE is part of the Conservative Growth Portfolio. I think profits — and perhaps the stock — could grow 12% to 15% a year long-term. But there’s a “cloud” having over the stocks, and that’s the risk of competition from companies like Canva offering similar services for a fraction of the cost and Figma, which allows multiple users to work on the same image/video at the same time.

One Year Chart

The good news is the shares are a nice value here. The P/E is just 19 when we look to 2025 profit estimates. My Fair Value is a 25 P/E, giving the stock a 2025 Fair Value of $510.

The Estimated Long Term Growth Rate of 13% a year is on target, in my opinion.

Qtrly profit growth has slipped from 15% to 13%. Slowing growth isn’t good. Estimates might get beaten when the results are released. Last qtr, the estimate was 11% profit growth and the company did 13%.

Earnings Table

Last qtr, Adobe delivered 13% profit growth and beat expectations of 11% growth. Revenue increased 10%, year-on-year, and slightly above estimates of 9% growth. Operating Margin was 47.5% compared to 47.6% in the year ago period.

• Creative Cloud growth was driven by broad-based adoption across routes to market and product portfolio with particular strength in new offerings life Firefly Services, an increasing number of One Adobe deals and a growing base of web and mobile users.
• Document Cloud growth was driven by strong organic demand, continued optimizations in free to paid conversion journeys and AI Assistant being released in additional languages.
• Experience Cloud growth was driven by strong AI demand, first-party data use, major brand wins, and creative-marketing integration.
• Adobe Acrobat and Adobe Reader monthly active usage grew 23% year over year.
• Adobe Acrobat Web monthly active usage grew 50% year over year.
• Adobe Express onboarded nearly 6,000 new business last qtr, representing approximately 50% growth sequentially.

Annual Profit Estimates decreased this qtr. For 2025, management expects revenue to be in range of $23.30 billion to $23.55 billion, which assumes current macroeconomic conditions.

Qtrly profit Estimates are 11%, 10%, 9%, and 10% for the next 4 qtrs. Analysts believe Adobe revenue will grow 10% next quarter.

Fair Value

My Fair Value is $510, giving the stock upside of 32%.

My 2026 Fair Value is $573, giving the stock an upside of 49%.

The stock has good upside. But annual estimates have declined the past three qtrs.

Note the company has a November 30th Fiscal Year end.

Bottom Line

Adobe (ADBE) has been on a wild ride the past three years. The reason for the fall was the stock had a lofty P/E of 51 in August 2021. That was too high. So the stock digested its gains. In September 2022, the stock’s P/E was just 18 and that was around the bottom.

Adobe’s got the high-end graphics programs. And AI is making them better But competition from the likes of Canva and Figma makes me question the long-term outlook.

ADBE ranks 5th in the Conservative Growth Portfolio Power Rankings. Upside here is solid. I sold ADBE from the Growth Portfolio on February 1, 2022 and the stock was $528 that day.

Power Rankings

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Aggressive Growth Portfolio

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Conservative Stock Portfolio

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