Technology has been one of the worst-performing sectors in 2025, led by a sell-off in megacap behemoths like Apple, Microsoft, and Nvidia. But Adobe (ADBE 7.58%) has held up well and is up slightly year to date at the time of this writing.
Here's why Adobe has a lot to prove on March 12 -- when it reports first-quarter fiscal 2025 results and likely updates its full-year guidance -- and whether this growth stock is worth buying now.
Image source: Getty Images.
Adobe is coming off a brutal sell-off in 2024
As mentioned, Adobe is holding up better than other megacap tech stocks so far this year.
However, it was one of the worst-performing tech stocks in 2024 -- losing over 25% of its value despite a 20.8% gain in the sector.
Adobe has developed exciting new artificial intelligence (AI) software solutions but hasn't provided a clear road map for AI monetization in the same way as other software giants like Salesforce.
Adobe isn't delivering on investor expectations
To its credit, the company has innovated rapidly with new generative AI tools for images, vectors, designs, and videos; subscription add-ons with AI assistants; AI-embedded editing applications, and more. But the forecast for how these developments will impact the bottom line is cloudy at best.
The midpoints of fiscal 2025 guidance are $23.43 billion in revenue and $20.35 in adjusted earnings per share (EPS), which would imply just 8.9% year-over-year revenue growth and 10.5% adjusted EPS growth. Adjusted numbers leave out certain accounting measures like stock-based compensation, which can provide a more accurate reading on business operations. But figures based on generally accepted accounting principles (GAAP) are better for looking at pure profit.
The key takeaway is that Adobe's forecast growth rate for fiscal 2025 is fairly weak for a company developing cutting-edge AI solutions. And to make matters worse, its revenue and earnings had already been growing slower than historical rates.
Sluggish growth
Over the last few years, the company has been growing annual sales in the low double digits and earnings in the low to mid double digits. Fiscal 2025's projections would mark the lowest annual revenue increase and nearly the lowest earnings growth in a decade.
|
Metric |
Fiscal 2016 |
Fiscal 2017 |
Fiscal 2018 |
Fiscal 2019 |
Fiscal 2020 |
Fiscal 2021 |
Fiscal 2022 |
Fiscal 2023 |
Fiscal 2024 |
Fiscal 2025 Projections |
|---|---|---|---|---|---|---|---|---|---|---|
|
Revenue |
$5.85 billion |
$7.3 billion |
$9.03 billion |
$11.17 billion |
$12.87 billion |
$15.79 billion |
$17.61 billion |
$19.41 billion |
$21.51 billion |
$23.43 billion |
|
Revenue (YoY growth) |
21.9% |
24.8% |
23.7% |
23.7% |
15.2% |
22.7% |
11.5% |
11.4% |
10.8% |
8.9% |
|
Adjusted EPS |
$3.01 |
$4.31 |
$6.76 |
$7.87 |
$10.10 |
$12.48 |
$13.71 |
$16.07 |
$18.42 |
$20.35 |
|
Adjusted EPS (YoY growth) |
44.7% |
43.2% |
56.8% |
16.4% |
28.3% |
23.6% |
9.9% |
17.2% |
14.6% |
10.5% |
Data source: Adobe.
Adobe ramped up expenses, including research and development, to build its new AI tools. A slowdown in earnings, at least for a while, was understandable. But we are entering what is effectively the third year of the company's AI rollout. Instead of proving to investors that the technology is a growth catalyst, the business is showing a deceleration in sales and earnings growth.
With the numbers moving in the opposite direction, investors may be wondering if AI will be a net positive for the company. And even if it improves Adobe's product suite, what if its competitors leverage AI more effectively and then undercut Adobe on price?
On the December earnings call, management discussed its growth algorithm and why the company is more focused on attracting new users and measuring engagement with its AI tools rather than price increases. But as last year's downward pressure on the stock price showed, patience has run out for the AI experiment.
A few positives worth considering
Despite the lackluster results in recent years, the company does have a few key things going for it. Adobe has set the bar low for fiscal 2025 by providing what was largely received as weak guidance.
The company is still growing, just at a slower pace. It remains a high-margin business that generates a ton of free cash flow and more than offsets stock-based compensation with stock buybacks (the share count has decreased 9.7% in the last five years).
The stock's valuation is reasonable. Based on adjusted fiscal 2025 EPS of $20.35, it has a forward price-to-earnings ratio of 21.9. On a GAAP basis, even the midpoint EPS of $15.95 would give it a forward P/E of 28, which isn't terribly overpriced.
Adobe has been an underwhelming AI play so far, but because the stock sold off so much last year and earnings continue to grow, the valuation has reached the point where the stock can be considered a worthwhile long-term buy.
Adobe is a balanced buy for patient investors
Adobe is worth a closer look for investors who like its fundamentally sound business and who believe AI will be a net positive for the company. Since the valuation is low, it doesn't have to deliver lights-out earnings growth. But it must prove that AI can be a competitive advantage rather than a deterrent.
If Adobe flips a switch and delivers a clear and concise path to faster AI-fueled growth, the stock could become too cheap to ignore.
