Core Viewpoint - Morgan Stanley believes that Adobe's current valuation is attractive, with pricing strategies and the long-term potential of generative AI (GenAI) likely to drive earnings per share (EPS) growth, maintaining an "overweight" rating with a target price of $510 [1] Group 1: EPS Growth Catalysts - Three main factors are identified that could change the direction of EPS growth: optimistic revenue growth trends, ongoing stock buybacks, and mid-term profit margin improvements [2] - The expected annual recurring revenue (ARR) growth for Adobe's digital media business in FY2025 is projected at 11%, with a potential slowdown in the second half due to pricing changes [2][3] - Recent price changes are expected to positively impact ARR, with a projected increase of approximately 15% for FY2025 [3] Group 2: Pricing Strategy and Market Position - Adobe's pricing strategy is crucial for driving product innovation and profitability, especially in a competitive landscape [2] - The flexibility in pricing for lower-end market segments may help mitigate potential customer churn [2] - The company has seen a 15% underperformance compared to large software peers over the past three months, indicating investor concerns about its competitive positioning [1] Group 3: Profit Margin and Stock Buybacks - Adobe has consistently used about 90% of its free cash flow for stock buybacks, leading to an average annual reduction of approximately 2% in its share count [8] - The CFO indicated that there is room for further expansion of operating profit margins in the mid-term, despite current margins being among the best in the industry [7][8] - The company aims for EPS growth to outpace revenue growth once it moves past its current investment cycle [7] Group 4: Market Conditions and Future Outlook - The uncertain macro environment is expected to suppress demand for marketing technology, potentially impacting revenue growth in FY2025 [5] - The digital media ARR growth is anticipated to reach 11% year-over-year, although the range of predictions remains wide due to market uncertainties [6] - The introduction of AI models for video and audio is expected to enhance credit consumption, with significant growth anticipated by FY2026 [4]

Core Viewpoint - Adobe is facing challenges due to concerns about AI disruption affecting its creative software suite, leading to a significant decline in stock price and slower sales growth [2][3]. Group 1: Stock Performance - Adobe stock is down nearly 30% from its 52-week high of $587, making it a potential buy-the-dip candidate [1]. - The stock is down 5% in 2025 and has only increased by 12% over the last three years, underperforming compared to broader indexes and the Zacks Computer-Software Industry, which has gained nearly 100% [4]. Group 2: Financial Expectations - For Q2, Adobe's sales are expected to rise by 9% to $5.79 billion compared to $5.31 billion in the same quarter last year, while EPS is projected to increase by 11% to $4.96 from $4.48 [5]. - Adobe has consistently surpassed Zacks EPS Consensus for 25 consecutive quarters, with an average earnings surprise of 2.53% in the last four quarters [6]. Group 3: Valuation Metrics - Adobe trades at a forward P/E of 20.4X, which is below the S&P 500's 23.2X and offers a 41% discount to its Zacks industry average [8]. - The stock is trading at a significant discount compared to its decade-long median of 42.7X forward earnings and well below its peak of 65.4X during this period [9]. Group 4: Future Outlook - Adobe holds a Zacks Rank 3 (Hold) ahead of its Q2 report, with long-term shareholders potentially rewarded if the company can meet or exceed quarterly expectations and provide favorable guidance to alleviate AI disruption concerns [10].

Core Viewpoint - Adobe is expected to report its second-quarter fiscal 2025 results on June 12, projecting total revenues between $5.77 billion and $5.82 billion, with non-GAAP earnings between $4.95 and $5 per share [1][10] Revenue Projections - The Zacks Consensus Estimate for revenues is $5.79 billion, indicating an 8.99% growth from the previous year [2] - The Digital Media segment revenues are projected to be between $4.27 billion and $4.30 billion, suggesting a 9.3% year-over-year growth [3] - The Digital Experience segment revenues are anticipated to be in the range of $1.43 billion to $1.45 billion, with a consensus estimate of $1.43 billion indicating an 8.3% year-over-year growth [4] Earnings Expectations - The consensus mark for earnings has remained at $4.96 per share, reflecting a 10.71% growth from the year-ago quarter [2] Growth Drivers - Adobe's strong Generative AI portfolio and partnerships with major companies like Amazon, Microsoft, and Alphabet are expected to drive top-line growth [5] - The launch of Firefly Image Model 3 and enhancements to existing models have improved user experiences across Adobe's tools [6] - Increased adoption of Adobe Express by businesses and integrations with popular applications like ChatGPT and Google have expanded customer reach [7] Competitive Landscape - Adobe's Document Cloud AI Assistant is now integrated into various platforms, enhancing its utility for users [8] - Despite strong growth factors, Adobe faces stiff competition in the GenAI space and challenges in monetizing its AI solutions [9][20] Stock Performance - Year-to-date, Adobe shares have declined by 6.4%, underperforming the broader Zacks Computer and Technology sector and the Zacks Computer Software industry [11] - Adobe's current valuation is considered stretched, with a forward 12-month price/sales ratio of 7.22X, higher than the sector's 6.37X [14] Strategic Partnerships - Adobe's partnerships with Amazon and other tech giants enhance its offerings and customer base, particularly through the Adobe Experience Platform on Amazon Web Services [17] - The integration of Acrobat PDF technology into Microsoft Edge and Google Chrome is a significant advantage, contributing to rising free-to-paid conversions [17]

Core Insights - Adobe's stock is currently trading 40% below its all-time highs as it approaches its Q2 FY25 earnings release, raising concerns about slowing growth and valuation levels in the context of the tech sector [1][7][20] Financial Performance - Adobe's revenue growth has slowed to an average of 11% between FY22 and FY24, following a period of 15% to 25% growth for seven consecutive years after transitioning to a subscription model [4] - The company is projected to grow its revenue by 9% in FY25 and 10% in FY26, reaching $25.63 billion, with adjusted earnings expected to increase by 11% and 13% respectively [16] Competitive Landscape - Investors are concerned about the rapid rise of artificial intelligence offerings that allow users to create high-quality content with minimal skills, potentially threatening Adobe's creative software suite [2][5][11] - Adobe has responded by integrating AI features across its portfolio, including the launch of its generative AI platform, Firefly, which has generated over 22 billion assets since its debut [12][15] Strategic Moves - Adobe's decision to scrap its planned acquisition of Figma due to regulatory challenges has raised concerns about its ability to diversify and deploy cash effectively [5] - The company has emphasized the commercial viability of its AI features, positioning them as safer alternatives compared to other generative AI services that may face legal challenges [15] Market Position - Despite the recent selloff, Adobe's stock is trading at a 75% discount to its all-time highs and 33% below its median valuation at 23.5X forward 12-month earnings, indicating potential value for long-term investors [20] - Adobe's stock has appreciated nearly 1,500% over the past 15 years, significantly outperforming the tech sector, although it has seen a 2% increase in the last five years compared to the tech sector's 110% rise [18]

Group 1 - The focus is on growth and dividend income as a strategy for retirement planning [1] - The portfolio is structured to generate monthly dividend income that grows through reinvestment and annual increases [1] Group 2 - The article emphasizes that it is a personal opinion and not a recommendation for stock purchases or sales [2] - It highlights the importance of conducting individual research before making investment decisions [2]

Core Insights - Adobe is set to announce its earnings on June 12, 2025, with historical trends indicating a negative stock reaction post-announcement, as the stock has declined in 70% of cases over the last five years, with a median drop of 7.4% and a maximum loss of 16.8% [2][3] Earnings Expectations - Analysts project Adobe's earnings to be $4.97 per share with sales of $5.8 billion, reflecting an increase from the previous year's earnings of $4.48 per share and revenue of $5.31 billion [3] - The subscription business is performing well, but revenue growth in the generative AI sector has not met expectations, which will be closely monitored in the upcoming report [3] Financial Performance - Adobe has a market capitalization of $180 billion and generated $22 billion in revenue over the past twelve months, with operating profits of $8.0 billion and a net income of $6.8 billion [4] - The Trefis High Quality portfolio, which includes Adobe, has outperformed the S&P 500 with returns exceeding 91% since its inception, offering a lower volatility investment alternative [4][10] Historical Earnings Reaction - Over the last five years, Adobe has recorded 20 earnings data points, with only 6 resulting in positive one-day returns, indicating a 30% success rate for positive returns [7] - The median of positive returns is 3.9%, while the median of negative returns is -7.4% [7] Correlation Analysis - A strategy to assess the correlation between short-term and medium-term returns post-earnings can be beneficial, particularly if the 1D and 5D returns show a strong correlation [8] - Historical data suggests that the performance of peers can influence Adobe's post-earnings stock reaction, with price adjustments potentially occurring before the earnings announcement [9]

Group 1 - The VanEck Semiconductors ETF (SMH) has experienced sideways price action over the past 12 months, indicating a lack of significant movement in chip stocks since their peak [1] - The article highlights the importance of analyzing stock market sectors, ETFs, and economic data to identify potential investment opportunities [1] Group 2 - The author emphasizes the use of empirical data and charts to create evidence-based narratives that effectively communicate financial insights [1]

Group 1 - The next earnings date for Adobe is projected to be June 12, with earnings estimates of $4.97 per share and revenue of $5.80 billion [1] - Adobe has demonstrated impressive long-term earnings per share growth and revenue growth [4] - Earnings reports can lead to significant volatility in Adobe's stock, which may attract options traders, especially with options expiring on June 13 [5]

"Dirt cheap" and artificial intelligence (AI) aren't typically mentioned in the same sentence. There's a preconceived notion that many of the AI stocks in the market are quite expensive, which is, for the most part, a fair assessment. However, there are still plenty of dirt cheap stocks that look like screaming buys in the AI space. Two of them are Alphabet (GOOG -1.44%) (GOOGL -1.59%) and Adobe (ADBE -2.93%), and each looks like an incredible buy right now. Why are these two dirt cheap? I consider both of ...

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