Despite Adobe wrapping up its fiscal year on November 29 with record revenues, the company is currently experiencing a dip in its stock price. This downturn comes mainly because investors found its future outlook less than exciting. Adobe has pioneered in the world of generative artificial intelligence, showcasing innovation through its Creative Cloud, which includes the well-known Photoshop, and Document Cloud featuring Acrobat. However, its progress towards monetizing AI features hasn’t quite hit the mark yet.
As of now, Adobe’s stock has slid roughly 18% this year. So, let’s dive into their latest financial performance to determine if this might be a worthwhile investment moment as we move towards 2025.
Record Revenue, But Lackluster Guidance
For the fiscal year end, Adobe posted an impressive 11% increase in revenue, reaching $5.61 billion. This exceeded their previous guidance, which estimated between $5.5 billion and $5.55 billion. Similarly, their adjusted earnings per share saw nearly a 13% rise to $4.81, which surpassed their forecast of $4.63 to $4.68.
Breaking it down, their Digital Media segment, which includes the Creative and Document Cloud services, reported a 12% revenue jump to $4.15 billion. The Document Cloud was a standout, with its revenue leaping by 17% to $843 million, while the larger Creative business enjoyed a 10% revenue growth to $3.30 billion.
Adobe managed to secure $578 million in new Digital Media annualized recurring revenue (ARR), concluding the quarter with a Digital Media ARR of $17.33 billion. This shows only a 2% growth from the $569 million in new ARR gained the previous year.
Notably, Adobe continues to champion its AI tools, announcing that its Firefly AI model has reached over 16 billion image generations. They also introduced their Firefly video model in beta, which has sparked considerable interest, with plans for a wider release in early 2025.
Furthermore, their Digital Experience segment, which covers digital analytics and online marketing, achieved a 10% revenue increase, hitting $1.4 billion, while digital experience subscription revenue climbed 13% to $1.27 billion. Adobe noted strong demand for its new Adobe GenStudio for Performance Marketing.
Despite this quarter’s solid performance, investors were disheartened by Adobe’s future projections. For fiscal 2025, they expect revenues between $23.30 billion to $23.55 billion, reflecting an 8% to 9% growth, which falls short of the analyst consensus of $23.78 billion. The company also anticipates an adjusted EPS between $20.20 and $20.50.
Regarding the upcoming fiscal first quarter, Adobe forecasts revenue from $5.63 billion to $5.68 billion, showing a 9% to 10% growth from last year’s $5.18 billion, yet slightly below the $5.73 billion analyst forecast. They’re also projecting an adjusted EPS between $4.95 and $5.
Is the Stock Primed for a Comeback?
Adobe’s stock hasn’t exactly been a superstar this year, and while the company’s enthusiasm for AI is evident, this hasn’t yet translated into accelerated revenue growth. Its Creative Cloud, the largest revenue generator, only witnessed a 2% ARR growth last quarter, with the company foreseeing slower growth in 2025.
Currently, Adobe is navigating the challenge of attracting AI users while seeking ways to monetize AI developments. This approach fosters steady growth but hasn’t significantly boosted revenue growth, which is crucial for investor satisfaction. Although Adobe likely provided cautious guidance it could surpass, there’s no clear signal that revenue growth will pick up next year.
Their current model relies on credits for generative AI use, but their most significant potential may lie in moving away from this system. On a recent call, they hinted at introducing more tiers in their Creative offerings, which could be a more effective strategy for capitalizing on AI.
From an investment perspective, Adobe’s stock stands at a forward price-to-earnings ratio of 23.5 times the fiscal year 2025 analyst projections and a forward price-to-sales multiple below 9, which could be seen as relatively appealing.
Though Adobe still has a journey ahead to fully realize its potential, I appreciate their product innovation path, exemplified by the Firefly video. Perhaps more importantly, I believe they can enhance their monetization through tiered options. So, for those keen on investing, this may be a good time to consider buying Adobe stock during this dip.
