Adobe (ADBE 2.12%) stock has been on fire in 2023 with an impressive year-to-date gain of 59% as of this writing. This has been fueled primarily by the company's moves to capitalize on the growing adoption of artificial intelligence (AI) in the areas of content creation, digital media, and advertising. But the company's latest quarterly results seem to have shaken some of the confidence in its bull run.
Shares of Adobe fell more than 4% the day after the company released its fiscal 2023 third-quarter results (for the three months ended Sept. 1) on Sept. 14, which may seem a tad surprising. After all, Adobe not only beat the Wall Street consensus on revenue and earnings, but its guidance was also solid. Let's try to understand why Adobe fell after its quarterly report and check if any potential pullback in the stock price can be treated as a buying opportunity from a long-term perspective.
NASDAQ: ADBE
Key Data Points
Adobe delivered solid growth, but investors were expecting more
Adobe's fiscal Q3 revenue increased 10% year over year to $4.9 billion. The company's non-GAAP earnings grew at an even faster pace of 20% to $4.09 per share.
The software specialist is guiding for $5.0 billion in revenue and $4.13 in adjusted earnings per share (both figures at the midpoint) in the current quarter, again topping the analyst consensus. Those figures represent 10% and 15% year-over-year growth, respectively.
For a stock that's trading at 13 times sales and 48 times trailing earnings, it is likely investors were looking for a much stronger outlook from Adobe, especially considering that AI is supposed to be one of its key growth drivers. However, the latest results and guidance suggest its AI catalyst will need more time to play out.
That's not surprising as Adobe's AI-enabled offerings have only recently completed beta testing. The company's Firefly generative AI platform, which allows its customers to create "high quality images and stunning text effects," was unveiled in March this year. The platform was in the beta phase all this time and was made commercially available only on Sept. 13.
During this six-month period, creators used Adobe Firefly to generate a whopping 2 billion images. Adobe can now capitalize on the massive popularity of this platform since it has now introduced paid subscription plans, made Firefly for Enterprise generally available for businesses, and integrated its generative AI features into other properties such as Creative Cloud, Photoshop, Illustrator, and Express.
Adobe's efforts to monetize its generative AI efforts are currently in their early stages, but once they start gaining traction, it won't be surprising to see the company benefiting big-time from this technology. That's because nearly three-fourths of digital marketers in the U.S. are using generative AI tools to generate text, images, and videos, according to Statista.
This explains why the value of AI in digital marketing is expected to jump to $107 billion annually in 2028 as compared to just $16 billion in 2021. Given that Adobe has already taken steps to capitalize on this lucrative opportunity, investors should expect the company's growth to accelerate in the near future.
A pullback could be an opportunity in disguise
Analysts also expect Adobe's growth to pick up slightly going forward. Estimates call for the top line to rise 10% in fiscal 2023 before climbing 12% next year and 13% the following year. But don't be surprised to see the company outpace those projections in light of recent initiatives.
Data by YCharts.
That's why investors would do well to take advantage of any further pullback in the stock following the latest report. Adobe is trading at a premium right now, but it still offers a significant long-term opportunity as a top AI stock.
