Most experts agree there's been a paradigm shift in technology thanks to the latest developments in artificial intelligence (AI). Recent advances in generative AI have paved the way for a multitude of new use cases, as these systems can generate original content, handle menial tasks, streamline time-consuming procedures, and automate processes -- all with a few simple keystrokes. This promises a giant leap forward in productivity, saving businesses time and money.
The shift to adopt AI has already begun, with AI-centric chips taking center stage. Demand for AI software solutions is only beginning to take shape, but the potential is vast. It's estimated that generative AI software sales could soar as much as 18,647% to $280 billion by 2032, according to data compiled by Bloomberg Intelligence.
While AI began making headlines early last year, investors might be surprised to learn that Adobe (ADBE +0.36%) established a beachhead in AI back in 2016 and has been a pioneer in the space ever since.
Image source: Getty Images.
AI solutions, years in the making
Adobe made a name for itself by providing software that helps users create, publish, and promote content. The most widely known are Photoshop and Acrobat PDF software. However, the company also has a long history of developing AI-based tools for its customers.
At Adobe MAX 2016, the company's annual creativity conference, it unveiled Adobe Sensei. The company described the tool as "a new framework and set of intelligent services for dramatically improving the design and delivery of digital experiences." The pioneering system leveraged AI, machine learning, and deep learning technologies to perform a wide variety of complex tasks for creators, including:
- Image-matching across millions of images
- Sensing documents' meanings and sentiments
- Fine-tuning an approach based on the target audience
These capabilities and many more were deeply integrated into Adobe's Creative Cloud, Document Cloud, and Marketing Cloud, making them available to users years ahead of their time.
Yet, that was just the beginning. Early last year, Adobe unveiled Firefly, its suite of generative AI models designed to help users generate media content, streamlining the process. These models can "amplify creativity and intelligence without replacing the beauty and power of the human imagination."
Adobe customers use Firefly tools "to create, edit, measure, optimize, and review billions of pieces of content with power, precision, speed, and ease." Firefly helps users create images and edit photos and videos, among other tasks.
The utility of these tools is helping Adobe attract more users to the free-to-use versions of its software. The company is also doing a better job converting these free users to paying customers, boosting future growth.
NASDAQ: ADBE
Key Data Points
The numbers tell the tale
Adobe's recent results illustrate that these next-generation software tools are finding their target audience. For its fiscal 2024 second quarter (ended May 31), Adobe generated record revenue of $5.31 billion, up 10% year over year, while earnings per share (EPS) of $3.49 jumped 24%.
To close out the quarter, remaining performance obligation (RPO) -- or contractually obligated sales that haven't yet been booked as revenue -- climbed to $17.86 billion, an increase of 17%. It's always a good sign when RPO is growing faster than revenue, as it provides insight into future sales trends -- and in this case, the news is good.
Management clearly believes the company's growth streak will continue, increasing its outlook for the full fiscal year. The company now expects revenue of $21.45 billion at the midpoint of its guidance, an increase of 11% year over year, resulting in adjusted EPS of $18.10, up 13%.
An attractive opportunity
Shares currently trade for roughly 27 times analysts' estimates for Adobe's fiscal 2025 earnings. That's an attractive price for an AI pioneer with solid growth, lots of recurring, subscription-based revenue, and plenty of opportunity to capitalize on the growing adoption of AI.
Generative AI is still in the earliest stages of adoption, and the ongoing deployment could take years or even decades. Thanks to years of real-world expertise and a built-in customer base, Adobe has positioned itself as an early beneficiary in the next stage of the AI revolution.
