Adobe Inc. (NASDAQ:ADBE) is emerging as a leader in generative AI tools that focus on visual media. The recently reported second-quarter financial results beat expectations, and the conference call was dominated by AI updates. With the AI suite only recently launching in beta, Adobe’s momentum in this area is just getting started. Thus, the long-term growth and earnings outlook may be stronger now than earlier, such as at the height of the pandemic boom.
Adobe reported total revenue of $4.82 billion in Q2, beating the consensus by a solid $50 million, with net new annual recurring revenue (ARR) in Digital Media reaching $470 million and Digital Experience subscription revenue crossing the $1 billion. However, the expected wave of demand following the early AI tools rollout has yet to be reflected in the numbers. The Adobe Express and Firefly, the recent AI offerings, extend Adobe’s leadership in core creative categories. Attracting a larger global audience, these innovative products, and Adobe’s generative AI co-pilot will add to profitability through new monetization opportunities.
The forecast for total revenue of around $19.3 billion represents a 9% YoY increase or a 13% increase on a constant currency basis. The expected strength is more pronounced towards the end of the year and into 2024. With ADBE’s featured products representing turn-key platforms where the global user base can begin leveraging AI’s potential immediately, there is a lot to like about ADBE.
ADBE is well-positioned to consolidate its leadership in the years to come, given its importance to the broader AI ecosystem. Adobe’s partnership announcements with NVidia Corp. and Alphabet Inc., among others, further add to its relevance. Additionally, Apple Inc. has implemented Adobe’s Lightroom with AI capabilities on its new Vision Pro VR headset, which caters to metaverse opportunities, a future growth driver. Shares are already trading at around 32x on the metric, while the stock historically commanded a multiple closer to 50x over the past decade.
ADBE’s new AI focus coupled with its high-quality fundamentals warrants a higher premium. Its relative stickiness with users typically tied to the platform for the long-run translates into high-quality cash flows and lower variability of quarterly results, which supports the valuation. The shares are currently trading at the highest level since early 2022, with updates on new product development and AI initiatives expected to keep the bullish trend going.
However, investors should note that these momentum tech stocks are prone to wide swings of volatility, and market conditions are ever-changing. A deterioration of the economic outlook would also undermine the operating environment, forcing a reassessment of the earnings outlook. Investors should, therefore, keep an eye on macroeconomic trends that may alter the playing field.
