Adobe Sees AI Traction, but Is It Enough to Get the Stock Moving Higher?

In what has been a common theme over the past couple of years, Adobe (ADBE -2.66%) reported solid quarterly results, but the stock sold off with investors seemingly left wanting more from the maker of Photoshop and Acrobat. The stock is now down more than 10% on the year and has been running in place over the past five years.

Let's take a close look at Adobe's results to see if there is anything that can get the stock moving in the right direction.

Image source: Getty Images.

AI in focus

Adobe called artificial intelligence (AI) an accelerant that is leading to increased interest in creative storytelling. The company is trying to benefit from this trend with its generative AI platform Firefly. The platform lets users generate images, video, audio, and vector content through simple natural language prompts while giving users a high level of creative control.

What helps differentiate Firefly is its flexibility and IP protection. Adobe is combining its own commercially safe AI models with third-party tools from companies like OpenAI and Google to give users flexibility without sacrificing IP protection. This is important because commercial users don't want to get sued for IP infringement. Firefly also integrates directly with Adobe's Creative Cloud programs, like Photoshop, to allow users to edit AI-generated content with its creative tools.

Its new Firefly app is also proving to be a strong growth driver by helping bring new users to the Adobe ecosystem. During the quarter, the company saw a 30% sequential jump in first-time subscribers.

Adobe is also targeting business professionals and consumers by integrating AI into its Document Cloud and Express platforms. Users can now use AI tools in these platforms to do such things as identify buying behaviors in market research documents and then use that information to create a better TikTok marketing video in Express.

This strategy is gaining traction. Monthly active users for Acrobat and Express combined grew more than 25% year over year, reaching 700 million. Express adoption within Acrobat surged 11x year over year, while subscription revenue for the segment climbed 15%, fueled by strong uptake among students, small and medium-size businesses (SMBs), and large enterprises. Express alone added 8,000 new business customers in the quarter, including major names like Microsoft, Workday, and the NFL.

This all helped Adobe achieve record quarterly revenue of $5.87 billion, up 11% year over year. This was solidly ahead of its prior guidance for revenue of between $5.63 billion to $5.68 billion. Its adjusted earnings per share (EPS), meanwhile, climbed 13% to $5.06, ahead of its $4.95 to $5.00 guidance.

Among individual segments, Digital Media, which is home to both its Creative and Document Cloud businesses, saw revenue rise 11% to $4.35 billion. Digital Media annualized recurring revenue (ARR) climbed 12% to of $18.09 billion.

Adobe's Digital Experience segment, which provides digital analytics and online marketing services, saw revenue rise by 10% to $1.46 billion, with digital experience subscription revenue climbing 11% to $1.33 billion. Adobe GenStudio for performance marketing continues to be a growth driver.

Looking ahead, Adobe raised its full-year outlook, which can be seen in the table below.

Data source: Adobe earnings releases.

For its fiscal third quarter, meanwhile, it provided the following forecast.

Is the stock a rebound candidate?

Adobe is seeing solid growth from its AI initiatives, but they really haven't helped accelerate revenue growth. The company has really settled into being a consistent 10% to 12% revenue grower the past couple of years. At this point, that's what really should be expected.

From a valuation standpoint, the stock currently trades at a forward price-to-earnings (P/E) ratio of 17 times fiscal year 2026 analyst estimates and a forward price/earnings-to-growth (PEG) ratio of near 0.75. A PEG below 1 is generally considered undervalued, and software subscription businesses often get premium valuations due to their recurring revenue streams.

While Adobe isn't likely to turn into a high-powered growth stock, it looks attractively valued for what it is. I don't see an immediate catalyst for the stock, but at its current valuation, not a lot needs to go right to start getting it moving.