Adobe Earnings Were ‘Solid.’ Long-Term Growth Concerns Remain.

Adobe stock was down slightly after strong earnings. (David Paul Morris/Bloomberg)

Key Points

About This Summary

• Adobe’s stock dipped despite Q3 earnings exceeding expectations, with strong annualized recurring revenue.
• Analysts are divided; some are optimistic about Adobe’s AI potential, others are cautious about long-term growth.
• BofA Securities lowered its price target, while Deutsche Bank anticipates the stock to remain rangebound.

Adobe stock was down slightly Friday as some analysts celebrated the latest earnings results, while others still have doubts about the creative software company’s long term growth opportunities.

Adobe reported better-than-expected third-quarter financial results after the stock market closed on Thursday. Earnings and revenue beat analyst estimates, annualized recurring revenue was stronger than expected, and artificial intelligence influenced revenue surpassed the company’s goals. Adobe also raised its full year earnings and revenue guidance.

“Adobe reported solid third-quarter results that outperformed consensus estimates on all key metrics,” William Blair analyst Jake Roberge wrote in a research note Friday.

Roberge believes that the Adobe is “well positioned to capitalize on the GenAI opportunity, the increasing need for creative content, and shifting consumer preferences toward digital interactions.” He rates Adobe as Outperform without a price target.

A highlight from the report was signs that demand for the company’s AI software has been growing. Adobe announced that 99% of Fortune 100 companies have used AI in an Adobe app, and over 40% of its top 50 enterprise accounts doubled their annualized recurring revenue spend since the start of fiscal year 2023.

“We view the strength in the AI marketing suite, GenStudio, as validation that Adobe’s value proposition for leveraging AI across both content creation and workflow is resonating in the enterprise,” BofA Securities analyst Brad Sills wrote in a note Thursday night.

Despite maintaining a Buy rating for Adobe, Sills cut his price target on the stock to $460 from $475, citing multiple compression for software applications stocks this year.

Adobe currently trades at 15.3 times earnings expected over the next 12 months, down from 21.5 times on Jan. 1 of this year. Another software stock, ServiceNow, trades at 49 times forward earnings, below 63.8 times on Jan. 1, while Salesforce trades at 20 times forward earnings, below the 30 times multiple at the start of the year.

Deutsche Bank analyst Brad Zelnick wrote in a research note Thursday night that even though “results were an incremental positive, we don’t expect the event to meaningfully impact longer-term debates on the stock.”

“We still expect the stock to remain rangebound until the company demonstrates more tangible success from AI in its overall financials,” Zelnick wrote. He rates Adobe as a Hold with a $405 price target.

Shares of Adobe were down 0.6% Thursday to $348.39. The stock has dropped 21% this year.

Write to Angela Palumbo at angela.palumbo@dowjones.com