Adobe (NASDAQ:ADBE) is a company that dominates creative software and PDF tools. It makes 87% of its revenue from subscriptions, which makes it a very resilient company, but startups like Canva and other AI companies are making things much more competitive.
For example, people can now highlight parts of an image and prompt an AI model to edit it. They can also generate designs instantly from scratch, and it has reduced the amount of time people spend on Adobe’s software products like Photoshop.
ADBE stock has declined by over double digits today after its Q1 FY2025 earnings release. It beat revenue and earnings estimates, but investors were still spooked. Here’s what you need to know:
Adobe’s decline was mainly due to its disappointing forward guidance. Q2 revenue forecast came in at $5.77–$5.82 billion vs. the consensus of $5.8 billion. Investors were likely spooked as the lower end of the guidance still implies a chance of Adobe missing expectations.
The full-year revenue outlook also wasn’t very rosy. Adobe expects $23.3 billion to $23.55 billion in revenue vs. the consensus of $23.5 billion. Investors wanted stronger acceleration due to Adobe’s aggressive AI integration.
Most AI stocks are being scrutinized significantly more in the current environment, and Adobe’s big bet on AI is now weighing on the stock due to AI monetization concerns.
AI-first products generated $125 million in annualized recurring revenue (ARR), but it’s not very clear whether or not the margins from these products were worth the investments made by Adobe in AI.
Moreover, competition from AI-native startups is already causing pricing pressures (e.g., 50 cents per AI-generated video) and raising doubts about Adobe’s ability to maintain dominance.
Most analysts are bullish on the stock, with 16 “Buy” ratings, 11 “Hold” ratings, and one “Sell” and one “Strong Buy” rating. That said, Adobe’s recent performance has led to many analysts lowering their price targets and ratings.
Nine analysts lowered their target this month alone.
This is a household name with very recognizable products, and ADBE is likely to deliver solid returns in the long run. But given the revenue growth deceleration and the broader market environment, it’s a better idea to wait for a lower price.
