Despite yet another solid quarter and raised guidance, Adobe's (ADBE +1.63%) stock once again failed to gain much traction after earnings. The stock is down about 20% on the year, and has fallen 25% over the past five years.
Let's take a close look at Adobe's results and prospects to see whether its stock can finally break out.
NASDAQ: ADBE
Key Data Points
Solid results
Adobe continues to embed artificial intelligence (AI) across its products to help fuel growth. While it developed its own generative AI model, Firefly, it's also adding third-party models and products to its platform, including Alphabet's Gemini model and Veo 2 video generator.
The company said it's now looking to provide the operating system for creative work. It said Firefly is seeing strong adoption, and that its AI-influenced annual recurring revenue (ARR) now topped $5 billion, up from $3.5 billion at the end of the last fiscal year.
Image source: Getty Images.
Adobe also continues to target customers outside of creative fields who want AI to help with their content. On this end, the combined number of monthly active users for its Document Cloud and Express products climbed 20% since last year.
Overall, Adobe reported record quarterly revenue of $5.99 billion, an 11% year-over-year increase. This was just ahead of its prior guidance for revenue of $5.875 billion to $5.925 billion. Its adjusted earnings per share (EPS) climbed 11% to $5.31, ahead of its $5.15 to $5.20 forecast.
Among individual segments, digital media, which is home to both the Creative and Document Cloud businesses, saw revenue jump by 12% to $4.46 billion. ARR in digital media also rose 12% to $18.59 billion.
Revenue in the digital experience segment, which provides digital analytics and online marketing services, increased by 9% to $1.48 billion; digital experience subscription revenue jumped 11% to $1.37 billion. Adobe GenStudio, which is used for performance marketing, was a big driver for the segment, with ARR growing 25% to over $1 billion.
Looking ahead, Adobe raised its full-year outlook, as seen in the table below:
| Metric | FY 2025 Forecast (December and March) | FY 2025 Forecast (June) | FY 2025 Forecast (September) |
|---|---|---|---|
| Revenue | $23.3 billion to $23.55 billion | $23.5 billion to $23.6 billion | $23.65 billion to $23.7 billion |
| Digital media segment revenue | $17.25 billion to $17.4 billion | $17.45 billion to $17.5 billion | $17.56 billion to $17.59 billion |
| Digital experience segment revenue | $5.8 billion to $5.9 billion | $5.8 billion to $5.9 billion | $5.84 billion to $5.86 billion |
| Adjusted earnings per share | $20.20 to $20.50 | $20.50 to $20.70 | $20.80 to $20.85 |
Data source: Adobe earnings releases. FY = fiscal year.
For its fiscal fourth quarter, meanwhile, it provided the following outlook:
| Metric | Fiscal Q4 Forecast |
|---|---|
| Revenue | $6.075 billion to $6.125 billion |
| Digital media segment revenue | $4.53 billion to $4.56 billion |
| Digital experience segment revenue | $1.495 billion to $1.515 billion |
| Adjusted earnings per share | $5.35 to $5.40 |
Data source: Adobe earnings releases.
Can Adobe's stock break out?
While AI is helping drive Adobe's revenue growth, it hasn't accelerated it, which appears to be what investors want. Instead, it helped the company stay in the 10% to 12% revenue-growth range. AI products like Firefly, GenStudio, and Acrobat AI Assistant are gaining momentum, but they still aren't moving the needle in a big way yet.
Looking at valuation, the stock currently trades at a forward price-to-earnings (P/E) ratio of 15 times fiscal year 2026 analyst estimates, and a forward price-to-earnings-to-growth (PEG) ratio of near 0.7. A PEG under 1 is typically considered undervalued.
Software-as-a-service (SaaS) stocks have been out of favor in the market, as growth has moderated and investors wonder how their business models hold up with the advent of AI. Most of these companies, including Adobe, use seat-based models, meaning they sell their solutions based on the number of people using their product. The worry is that AI will eventually reduce jobs, leading to fewer seat-based subscriptions. That's a risk, but business models are likely to evolve if this happens.
Overall, Adobe has become a nice growth-at-a-reasonable-price (GARP) stock, and looks attractive at current levels. Sentiment will need to shift for the stock to break out, but the company has been seeing solid growth and trades at a reasonable valuation, which is a good reason to own it right now.
