This article focuses on Adobe (NASDAQ: ADBE ) in relation to the disruptive technology of Artificial Intelligence (“AI”). First I determine if the “AI Threat” is low, medium or high. Then I examine how Adobe is reacting to the AI challenge. Lastly, I attempt to valueDom received his MBA in Management and B.S. Finance (Manhattan College) and was credit trained at New York University. Dom received the Financial Risk Manager (FRM) designation from GARP.Areas of expertise are: Exponential Age & SaaS software an ...

Core Insights - The analysis focuses on high-quality companies that can outperform the market in the long run due to their competitive advantages and high levels of defensibility [1]. Group 1: Company Focus - The analysis is concentrated on companies in Europe and North America, without restrictions on market capitalization, covering both large-cap and small-cap companies [1]. Group 2: Analyst Background - The analyst has an academic background in sociology, holding a Master's Degree in Sociology with an emphasis on organizational and economic sociology, as well as a Bachelor's Degree in Sociology and History [1].

Investment Rating - The industry investment rating is "Positive" (maintained) [3] Core Insights - The AI application vendors in the US stock market achieved a total revenue of $23.599 billion in Q1 2025, with a year-over-year growth of 12.1%, and an average revenue growth rate of 20.37% [1][11] - The IT service vendors in the US stock market reported a total revenue of $37.612 billion in Q1 2025, reflecting a year-over-year increase of 5.59% [1][34] - The willingness of enterprises to invest in AI is rapidly growing, with expectations for global enterprise software and IT service spending to reach $1.25 trillion and $1.73 trillion in 2025, respectively [2][56] Summary by Sections 1. Industry Perspective: AI Deployment Demand Growth Opens SaaS and IT Service Market Space - AI application vendors in the US stock market showed significant improvement in profitability and operational efficiency in Q1 2025, with a combined net profit of $4.774 billion, a year-over-year increase of 55.76% [1][13] - The average operating profit margin for these vendors was 15.81%, up by 1.61 percentage points year-over-year [1][17] - The combined RPO (Remaining Performance Obligation) for AI application vendors reached $132.266 billion in Q1 2025, a year-over-year growth of 16.48% [1][26] 2. Tracking Overseas AI Application Vendors - Salesforce reported a revenue of $9.829 billion in Q1 2026, with a year-over-year growth of 7.62% [2][67] - Adobe's AI-first related product orders exceeded $125 million in Q1 2025, with expectations to double by the end of FY25 [2][33] - HubSpot's Copilot user base grew to over 660,000 in Q1 2025, reflecting a significant increase from 270,000 in Q4 2024 [2][33] 3. Recommendations for Focused Targets - Suggested targets include companies involved in Agent applications such as iFlytek and Focus Technology, as well as AI vertical applications like Kingsoft Office and Foxit Software [3]

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]