How valuable is AI? Wednesday's performance will be the "key to success or failure" for Adobe
Investors need to see concrete evidence of returns brought by AI. Analysts believe that due to the lack of clarity in Adobe's AI strategy, the company's stock is currently still in a "trial period."
Once a creative software giant, Adobe is now at a crossroads. Investors are concerned whether the company's AI tools can bring about tangible profits.
Since the beginning of this year, Adobe's stock has fallen by 5.7%, underperforming the software industry index, which has risen by more than 30%. The earnings report on Wednesday will be a litmus test for whether Adobe's AI transformation can succeed.
Jamie Meyers, a senior analyst at Laffer Tengler Investments, pointed out that this is a critical quarter:
"Whether Adobe can withstand competition and monetize AI remains to be seen. Although the stock is one of the company's top 12 creative assets, the lack of clarity in its AI strategy means it is still in a 'trial period.'"
Currently, the market expects Adobe's Q4 net profit to grow by over 13%, with revenue increasing by nearly 10%. However, the Net New Recurring Revenue (NNRR) is expected to decline by 3.1%, marking the first drop in this key metric in a year. Analysts also anticipate that Adobe's Creative Cloud division (which includes AI tools) will perform poorly.
Can AI reignite Adobe's growth engine?
In recent years, Adobe has been working to integrate its proprietary AI technology, Firefly, into products like Photoshop and Illustrator, but the rollout of its AI video products has lagged significantly behind OpenAI's Sora service.
Last quarter, Adobe stated that its strategy is to encourage customers to use AI features rather than directly profit from these tools. However, this strategy has begun to test investors' patience.
Currently, the market expects Adobe's Q4 net profit to grow by over 13%, with revenue increasing by nearly 10%. However, the Net New Recurring Revenue is expected to decline by 3.1%, marking the first drop in this key metric in a year. Analysts also anticipate that Adobe's Creative Cloud division (which includes AI tools) will perform poorly.
Tyler Radke, an analyst at Citigroup, expressed mixed feelings about the report:
"The core business continues to face ongoing revenue loss, and macro and competitive pressures have exacerbated this issue."
Radke lowered Adobe's target price, believing that due to Adobe's greater focus on expanding its user base rather than monetizing technology, its stock price may continue to fluctuate within a range.
At the annual meeting in October, Adobe discussed pricing issues for its AI video tools, but analysts remain cautious about the growth boost this initiative may bring. General expectations for net income and revenue in 2025 have declined over the past quarter.
Investors need to see concrete evidence of AI delivering returns
Other software companies have had mixed performances during the AI transition. For example, Salesforce Inc.'s AI strategy has received positive feedback from the market, while Oracle Corp. has failed to meet high market expectations.
Alonso Munoz, Chief Investment Officer of Hamilton Capital Partners, believes that Adobe needs to gain customer recognition through practical AI products, just like Salesforce.
"If Adobe's pricing can translate into growth this quarter, and investors like this performance, then the stock price will be rewarded. If this goal can really be achieved, I think it will catch up with other AI stocks."
Analysts believe that if Adobe can reassure investors about its long-term growth prospects, there is still room for its stock to rise based on valuation. Currently, Adobe's stock is trading at a price-to-earnings ratio of less than 27 times, below its 10-year average of 32 times, and also lower than the software industry index of 38 times.
However, investors need to see concrete evidence of returns from AI. Meyers from Laffer Tengler stated that the current lower valuation is reasonable because growth has slowed compared to the past few years.
"However, if Adobe can clearly profit from AI, it could trigger a wave of catch-up trading. We are optimistic but also cautious."
It is worth noting that although AI has been the focus for tech investors this year, quantum computing stocks have also seen significant gains recently. For example, IonQ Inc. has risen about 400% since its low in September, D-Wave Quantum Inc. has increased nearly 500%, and Rigetti Computing Inc. has soared over 840%. On Tuesday, after Alphabet Inc. announced significant progress with its Willow chip in the field of quantum computing, this sector became the focus of the market