AI integration sparks record revenue for Adobe

Adobe’s shares recently dropped despite posting a bigger-than-expected jump in profits and sales in the latest quarter. That’s because it sees some near-term weakness on the horizon.

Meanwhile, the firm isn’t standing still and is investing heavily in R&D spending, which helps it maintain its competitive edge in digital media. That’s all on top of rising interest in its artificial intelligence (AI) products. That has prompted existing customers to spend more and has attracted new ones.

All this adds up to make the firm a Power Buy.

The stock trades at 27.6 times the company’s forward earnings forecast, a high but reasonable multiple considering the firm’s AI growth prospects.

ADOBE INC. (Nasdaq symbol ADBE; www.adobe.com) operates through three main segments:

The Digital Media segment’s software includes Adobe Photoshop and Adobe InDesign. The Digital Experience segment provides analytics, social marketing, targeting, media optimization, and cross-channel campaign management software. It also offers premium video delivery. The Publishing segment produces software that lets computer users create, edit and share documents in the popular PDF format. It offers software to develop web applications.

Adobe shares took a big drop after the company reported its latest results—despite higher sales and profits.

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In the three months ended August 30. 2024, revenue rose 10.6%, to a record $5.41 billion from $4.89 billion. Excluding one-time items, earnings climbed 13.7%, to $4.65 a share from $4.09 a year earlier. Both revenue and earnings beat consensus estimates.

The company also spends a high 18% of its sales on research to stay ahead of the competition. Its balance sheet is nonetheless very strong: it holds cash of $7.5 billion.

The shares fell because the company reported a lower forecast for its upcoming quarter than expected. Adobe now expects earnings per share between $4.63 and $4.68 on revenue between $5.5 billion and $5.55 billion for its fourth quarter, lower than consensus estimates of $4.67 per share and $5.61 billion.

Growth Stocks: Expanding AI usage is one of Adobe’s key selling points

Adobe has just announced that it will unveil a new generative AI-powered video creation and editing tool in a limited release later this year.

The company aims to expand its suite of applications catering to creative professionals. Over the past year, Adobe has focused on adding generative AI features to its portfolio of software for creative professionals, including Photoshop and Illustrator. The company has released tools that use text to produce images and illustrations that have been used billions of times so far.

Called Adobe Firefly Video Model, the new artificial intelligence tool will be released in beta and will join the company’s existing line of Firefly image-generating applications that let users produce still images, designs and vector graphics.

The model will establish Adobe in the growing market for AI-based video generation tools, a space already targeted by OpenAI’s Sora, Stability AI’s Stable Video Diffusion and other AI video apps from smaller startups. OpenAI’s demonstration of Sora had spurred fears among investors that Adobe could be disrupted by the new technology and so lag behind.

The new AI can generate a five-second clip for a single prompt and can interpret both text and image prompts. Users can also specify the required camera angle, panning, motion and zoom.

Adobe says the video model is trained on public domain or licensed content that it has permission to use, and not on any its customer content.

Adobe is also rolling out Generative Extend, a tool that will be available in its Premiere Pro video editing software, which can extend any existing clip by two seconds by generating an appropriate insert to fill gaps in the footage.

Meanwhile, with an already-strong position in its key markets, Adobe’s sales should rise even higher in the future through its continuing adoption of AI-generated tools for its existing software—and its development of new software.

For all of fiscal 2025, the company will probably earn $18.45 a share, and the stock trades at a high, but still acceptable, 27.6 times that forecast.

Recommendation in Wall Street Stock Forecaster: Adobe Inc. is a buy.

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Jim Bates

Jim is an associate editor at TSI Network. He is the lead reporter and analyst for The Successful Investor and Wall Street Stock Forecaster and a member of the Investment Planning Committee. Jim has held the Chartered Financial Analyst designation since 1992 and spent more than a decade at the Financial Post DataGroup before joining TSI Network. He has a Bachelor of Commerce degree from the University of Toronto.

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