Adobe (ADBE +0.63%) fell 13.9% on March 13 in response to its first-quarter fiscal 2025 results and full-year guidance.
After tumbling 25.5% in 2024 despite a broader market rally, Adobe stock had been holding up well in 2025 and was even outperforming the tech sector. But the latest earnings report showed that Adobe is still a long way from delivering on investor expectations.
Here's what's going well for Adobe, what needs to be improved, and if the growth stock is a buy now.
Image source: Getty Images.
A steady performer at an inexpensive valuation
Adobe delivered record revenue of $5.71 billion for the quarter, a 10% year-over-year increase. Diluted earnings per share (EPS) came in at $4.10 on a generally accepted accounting principles (GAAP) basis and $5.08 on a non-GAAP basis -- which was 13.4% higher than the first quarter of fiscal 2024. Both figures exceeded Adobe's quarterly guidance, which was for $5.63 billion to $5.68 billion in revenue and non-GAAP EPS of $4.95 to $5.
Non-GAAP adjusts earnings for certain expenses, such as stock-based compensation (which Adobe pays a lot of). Non-GAAP numbers can provide a better reading of how the business is operating relative to past results, but GAAP is better for measuring true profit.
Adobe did not change its fiscal 2025 guidance, which forecasts $23.3 billion to $23.55 billion in revenue, $15.80 to $16.10 in GAAP EPS, and $20.20 to $20.50 in non-GAAP EPS.
Going off of the stock's premarket price of $416 at the time of this writing, Adobe would have a price-to-earnings (P/E) ratio of just 26.1 based on the midpoint of its GAAP earnings guidance and 20.4 based on the midpoint of its non-GAAP guidance. That's a dirt cheap price for what has historically been a high-growth cash cow with an industry-leading software suite for business, marketing, and creative professionals.
NASDAQ: ADBE
Key Data Points
Adobe is no longer a high-octane growth stock
Adobe's guidance marks a significant slowdown in the company's growth rate. It wasn't long ago that Adobe was growing revenue and earnings by over 20% per year, so the last few years of results and this year's guidance mark a noticeable slowdown.
As a business matures, investors typically expect growth to come down a little because it's more challenging to grow a massive, established business than a nimble company making inroads in new markets. But Adobe's slowdown is significant enough that it seems investors are reassessing its valuation.
One of the inherent qualities that separates growth stocks from dividend and value stocks is the premium placed on future results. Investors may be willing to pay a lofty price for shares in a company if it has a clear runway for rapid growth. In contrast, businesses growing slowly and lacking potential may fetch lower valuations.
Adobe's valuation is down from historical averages because the business isn't growing as quickly -- which makes a ton of sense based on its recent results and near-term forecast.
The optics of Adobe's slowdown are particularly bad in the age of artificial intelligence (AI). Adobe's stock price soared to near-record heights last year as investors expected Adobe to capitalize on AI. After all, if Adobe could use AI to make better products and help its users be more productive, it should theoretically help grow users and justify price increases. But that simply hasn't happened yet. And the longer Adobe goes without giving investors something to look forward to, the more likely it is that some investors may lose patience -- resulting in Adobe losing its growth stock premium.
Doubling down on AI
Adobe remains optimistic about AI's potential to transform its business. CEO Shantanu Narayen said the following on the earnings call:
AI represents a generational opportunity to reimagine our technology platforms to serve an increasingly large and diverse customer universe. With creativity at the core, we have been evolving our offerings and routes to market to anticipate the distinct needs of creative professionals and next generation creators, marketing professionals, agencies and enterprises and the broader set of consumers and business professionals. We believe this will drive continued growth and profitability.
Adobe has released several new products to help users leverage AI in marketing campaigns and content creation. These products are integrated across mobile and desktop and have tiered pricing that pairs with Adobe's software-as-a-service subscription model. On the earnings call, Adobe said that its AI-first stand-alone and add-on products contributed to a more than $125 million book of business exiting the recent quarter, which Adobe expects to double by the end of the fiscal year.
While it's encouraging to see AI contribute to revenue growth, that figure isn't much in the grand scheme of the total business -- especially considering that Adobe has been ramping up AI investments, leading to higher expenses.
A value play in the tech sector
Adobe's stock price and valuation will likely continue to languish until the company can demonstrate a better return on its AI investments and prove that AI is a real game changer for the business. Right now, AI seems more like a product upgrade than revolutionary technology.
That said, patient investors who believe in Adobe's ability to monetize AI are getting the chance to buy the stock at a compelling valuation. Adobe's growth may be slowing, but it remains a cash cow business with an impeccable balance sheet.
It's also worth mentioning that there are plenty of value stocks out there that aren't growing as quickly as Adobe, and yet are more expensive. So, if Adobe keeps selling off, it will eventually become too cheap to ignore.
Add it all up, and Adobe is an excellent buy for investors looking for value in the tech sector. But it's also reasonable to keep Adobe on a watchlist until the company bridges the gap between AI expectations and reality.
